Did the monetary policy of the Federal Reserve lead the financial crisis of 2007-2008?
Literature review and critical discussion
-1. How could the Federal Reserve prevent and solve financial crisis? – The function of Federal Reserve.
-2. The background of the financial crisis.—what kind of monetary policy the federal reserve made?
-3. The defending for the low interest policy.
-4. The against to the monetary policy
-4.1 Loose Fitting Monetary Policy
-4.2 The relevant between federal fund rate and housing boom and bust.
-4.3 Did the global saving glut push the interest rate down?
-4.4 Comparing with other countries’ monetary policy.
-1.5 The ...view middle of the document...
They hold that the Wall Street and financial regulators are responsible for this crisis. With unscrupulous credit rating agencies, wrong financial products, slack financial regulator, the financial system was morbid.
Both sides of the argument seem reasonable. However, a clear explain to this global disaster is really important. This paper aims to ravel out the performance of the Federal Reserve. The result of this research may be useful to know how the central bank affect financial market and how may avoid the same kind disaster.
There are 3 sub questions should be solved in this research.
Firstly, how could the Federal Reserve prevent and solve financial crisis?
Secondly, what relevant polices the federal reserve made before and after the financial crisis start?
Thirdly, did these policies work well to the financial market and the whole economy?
Literature review and critical discussion:
1. How could the Federal Reserve prevent and solve financial crisis? – The function of Federal Reserve.
The Federal Reserve, as a central bank, stands at the centre of the financial an economic system of the United States. The function of Federal Reserve had 2 aspects. (Bernanke, 2010)
The first is the economic function. Therefore, the Federal Reserve should try to keep macroeconomic stability, low inflation and avoiding big economic recessions and swings.
The second function is the financial stability function. The Federal Reserve should try to keep the financial system working well, prevent and solve financial crisis. (Bernanke, 2010)
The Federal Reserve has 3 sets of tools to achieve these goals.
Firstly, when the economy is stable, the main practice tool is monetary policy. When the inflation is decreasing too low or the economy is rising too slowly, the Federal Reserve could use low interest rate policy to excite the economy.
When the economy is rising too fast or the inflation rate is going too high, the Federal Reserve could raise the interest rate to reduce the stress of overheating.
Secondly, when the financial crisis is coming, the Federal Reserve will use the provision of liquidity. When the financial market is disrupted, the Federal Reserve can provide shot term credit to the financial institutions that can not find source of funding. Then the financial crisis may mitigate and the financial system could get well.
Thirdly, the Federal Reserve has the tool of regulation and supervision. The Federal Reserve usually supervises the banking system and assesses the extent of risk on their portfolios to make sure the financial system healthy. If the financial system could keep healthy, the risk financial crisis occurring will be low.
2. The background of the financial crisis.—what kind of monetary policy the federal reserve made?
In the late 1990’s, there was a boom and bust on information technology stocks. Because of that, a mild recession happened in 2001. The mild recession made people have over confidence to the stability of financial system...