The idea that former Federal Reserve Chairman Ben Bernanke’s ‘Quantitative Easing’ program deserves the credit for healing the wounds inflicted on our nation from the housing collapse of 2008 omits two possibilities: that we actually haven’t recovered, and his policies have actually laid the path for an even greater collapse ahead. The Chairman’s actions hold no precedent, he himself has even admitted to flying blind. The bond and mortgage backed security purchasing program (known as Quantitative Easing’ or just ‘QE’) creating the artificial high by re-inflating asset bubbles was the easy part. To truly follow out the process an exit strategy must be laid to liquidate the nearly ‘$4 trillion dollars’ in toxic assets the Fed now holds without pricking the bubbles that it’s purchasing frenzy created. Federal Reserve quantitative easing must be scaled back as it is re-inflating the housing bubble and recklessly propping up financial markets. The longer we wait, the bigger the eventual explosion will be.
Quantitative easing (or just ‘QE”) is a program carried out by the US central bank, otherwise known as the Federal Reserve. It is an unconventional program designed to artificially stimulate markets in recessionary periods via printing new money into existence to buy up particular monetary instruments. Purchasing these instruments works to push the interest rates large banks pay the Fed down to nearly zero in order to loosen up credit (currently 0.25%), as well as push down yield rates on US treasury bonds in order to keep the interest on the US National debt feasible. Since the housing collapse of 2008 (otherwise known as the ‘Great Recession’) the Fed has been purchasing up these toxic mortgage backed securities and...
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... strength of imaginary wealth, the government bubble (mortgages and bonds) is propping us up now. The pressure within the bubble will grow so great that the Fed will soon only have two options – 1. Finally contract the money supply and let interest rates spike -- which will cause immensely more pain than if we let this happen in 2002 or 2008, or 2. Keep pumping more dollars into the economy, causing hyperinflation and all the evils that come with it. The politically easier choice will be the latter, wiping out the dollar through hyperinflation. The grown up choice would be the former, electing for some painful tightening, which will also entail the federal government admitting that it cannot fulfill all the promises it has made, and it cannot repay everything that it owes. Regardless, well get the big crash. The longer we wait, the bigger the explosion will be.
-2. The background of the financial crisis.—what kind of monetary policy the federal reserve made?
However prior to 2008, nearly everyone was blind to their impending doom; investors, bankers, government regulators, the general population, and even the chairman of the Federal Reserve, Alan Greenspan, a man who was considered the economic guru, was fooled into believing the prosperity America had been enjoying would last for the foreseeable future (“Rethinking” 20). By this time there had been only mild economic downturns or, at most, short periods of turmoil. Financial institutions and large corporations had grown accustomed to the decades of economic prosperity resulting from the post-war economic boom, long forgetting the lessons learned from the Great Depression (“Rethinking” 20). In fact, economists concluded that America had entered a new era of calm. After a generation of portfolio managers and investors profiting from decades of favorable returns on stocks they believed the modern economy was impervious to major calamities (“Rethinking” 20). As inflation rates fell from record highs in the late 1970s and early 1980s to the record lows that they are today, interest rates followed enabling Americans to borrow more money from
By buying bonds from the open market, the Federal Reserve increases the reserves of commercial banks, which in turn will increase the overall money supply in the country. The opposite is true if the Fed sells bonds on the open market. By doing so, the Fed reduces the reserves of banks and, in turn, takes money out of the system. By being able to control how much money the commercial banks can lend, the Fed has a very powerful tool to adjust the economy. The second tool the Federal Reserve uses is the adjustment of the reserve ratio.
It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
Between January 2008 and February 2010, employment fell by 8.8 million, the largest decline in American history. The 2008 Recession, which officially lasted from December 2007 to June 2009, began with the bursting of an 8 trillion dollar housing bubble. Job losses during the recession meant that family incomes dropped, poverty rose, and people all over the country were suffering. Things like this don’t just happen. Policy changes incorporated with the economy are often a major factor. In this case, all roads lead to one major problem: Deregulation. Deregulation originating from the Carter and Regan Administrations, combined with a decrease in consumer spending, and the subprime mortgage bubble all led up to the major recession of 2008.
“There were no smiles. There were no tears either. Just the camaraderie of fellow-sufferers. Everybody wanted to tell his neighbor how much he had lost. Nobody wanted to listen. It was too repetitious a tale” (The New York Times, World History Book). The stock market crash was only one of many contributions leading up to the Great Depression. There were many economic and societal conditions that worsened throughout this time. Luckily there have been documentaries on the life that was lived by the people and how they got through it, just like the character in the movie Cinderella Man, Jim Braddock. Millions of Americans and even people across the globe were hit and somewhat effected by this tragic period in history.
Major banks are cutting back on some of their legally permitted operations, such as- market making, and that has led to liquidity issues in the bond markets. Proprietary trading could become unregulated if more banking activities continue moving towards the shadow banking system. This would essentially defeat one of the main purposes of Volcker Rule. [d] The third major unintended consequence has been the degree by which the Federal Reserve has become the main regulator of the finance industry. In order to discourage future bailouts similar to the ones during the financial crisis, the Dodd-Frank Act limited the Fed’s emergency powers. However the liquidity and capital standards now imposed by Fed has purportedly become one of the most important regulatory developments of the Dodd-Frank Act.
Americans to this day still remember the Great Depression of 1929. It was a horrific time for all of America. Following the stock market crash on Wall Street, millions were laid off, almost half of the banks failed, and people committed suicide. Currently, the U.S. stock market is better than it has ever been, with no fear of another crash, stock prices continue to rise. However, a rapid increase in American stock prices will result in an unrecoverable stock market crash and utter chaos. The scary part of a stock market crash is that no one, not even the experts on Wall Street, can predict when it will happen. The signs leading up to a crash are almost impossible to see until it actually happens. When it does, the U.S. will experience the worst economic collapse
There is perhaps no other political issue in our contemporary society that is more pertinent, pervasive, and encompassing than a nation’s economy. From the first coins used in Greece and the Asia Minor in the 7th century BCE, to the earliest uses of paper money, history has proven time and time again that the control of a region’s economy is absolutely crucial to maintaining social stability and prosperity. Yet, for over a century scholars have continued to speculate why the United States, one of the world’s strongest and most influential countries, has one of the most unstable economies. Although the causes of this economic instability can be attributed to multiple factors, nearly all economists agree that they have a common ancestor: the Federal Reserve Bank – the official central bank of the United States. Throughout the course of this paper, I will attempt to determine whether or not there is a causal relationship between the Federal Reserve Bank’s monetary policies and the decline of the U.S. economy. I will do this through a brief analysis of the history and role of this institution, in addition to the central banking system in general. In turn, I will argue that the reckless and intentional manipulation of the economy by the Federal Reserve Bank, through inflation and the abolishment of the gold standard, has led to the current economic crisis in the United States.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
Even before the creation of the Federal Reserve, banks were used by the public just as we use them today. Deposits were made into savings accounts. Loans were taken out to mortgage a home or finance a new business. Banknotes were issued and spent when the public borrowed from the banks. Borrowers spent these banknotes just as paper money is spent today. These bank notes were valued as money since they were backed by the promise that they would be exchanged on demand for either gold or silver.
Here's the scenario: "Recent global developments have pushed the economy into a slump. Industrial production is sluggish and it has become difficult to stimulate demand. The Real GDP is slipping and though inflation looks to be under control, unemployment seems to be soaring. As the Chairman of the Federal Reserve appointed by the President of Oval Office, an effective control of the money supply has to be done.
Ashworth, J. (2013). Quantitative Easing by the Major Western Central Banks During the Global Financial Crisis. Retrieved from http://www.dictionaryofeconomics.com/article?id=pde2013_Q000016#header
In 2008, the world experienced a tremendous financial crisis which is rooted from the U.S housing market. Moreover, it is considered by many economists as one of the worst recessions since the Great Depression in 1930s. After bringing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It ruined economies, crumble financial corporations and impoverished individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brothers and AIG. These collapses not only influenced own countries but also international scale. Hence, the intervention of governments by changing and expanding the monetary and fiscal policy or giving bailout is needed in order to eliminate and control enormous effects of the financial crisis.