The Financial Crisis of 2007-2008 and The Federal Reserve
analytical Essay
2612 words
Did the monetary policy of the Federal Reserve lead the financial crisis of 2007-2008?
Outline
Introduction
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 interaction between subprime mortgage problem and monetary factor.
Conclusion
Introduction
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
Some economists blame the Federal Reserve’s inaccurate monetary policy. The easy-monetary policy since 2001 was deviating from the Taylor rule. (Alex, 2013)
It made benchmark interest rate remains low. Then the excess liquidity made the asset bubble. Finally, the burst of asset bubble thumped the financial system. (Pierpaolo,B and Woodford,M, 2003)
On the other hand, s...
... middle of paper ...
...policy provided more empirical evidences. The responsibility of the monetary policy is proved by them. When the Federal Reserve makes the monetary policy, the authorities should respect the Taylor’s rule.
In addition, the Federal Reserve did badly on supervision of the financial market. Many banks did not have enough ability to value their risk. The Federal Reserve and other supervision institution should require these banks to enhance their ability of risk valuing.
The demonstration in this research is simple and the resources are not rich enough. The query to the relevance between the monetary policy and the house bubble still has not been answered. The level of effect the monetary policy made to the financial crisis is still has not been assessed.
In future research, the opinion should be provided in multiple aspects and by more powerful evidences.
In this essay, the author
- Describes the relevant polices the federal reserve made before and after the financial crisis started.
- Explains how the federal reserve could prevent and solve financial crises. the background of the financial crisis and what kind of monetary policy the federal reserve made.
- Argues that the financial crisis of 2007–2008 is considered by many economists the worst financial crises since the great depression of the 1930s.
- Explains that the federal reserve, as a central bank, stands at the centre of the financial an economic system of united states.
- Explains that when the economy is stable, the federal reserve uses low interest rate policy to excite it. when the financial market is disrupted, it provides shot term credit to financial institutions.
- Explains that the federal reserve implements low interest rate policy to deal with the weak economy, slow job growth, and low inflation. however, ben bernanke claims that monetary policy is not an important factor of raising the houses' price.
- Compares the changing of federal funds rate and the theoretical rate which based on taylor's rules, from 2000 to 2006. the deviation led the monetary excesses and encouraged the housing boom.
- Compares the housing boom-bust and counterfactual housing trading. the jagged line indicates the real housing during the period from 2000 to 2007.
- Analyzes the global saving and investment as a share of world gdp during the period from 1970 to 2004.
- Explains that the federal reserve was not the only central bank that made interest rate deviating from the taylor's rule. the housing boom was measured by changing housing investment as a percentage of gdp.
- Explains that the housing boom and bust affected the financial market and led to foreclosures and delinquencies. the low interest rate policy and excess risk taking are relevant.
- Argues that the monetary policy of the federal reserve led to the financial crisis caused by the assets bubble in house market.
Related
- explanatory
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- Essay On The Financial Crisis Of 2008explanatory essayThe financial crisis of 2008. The financial crisis of 2008 was caused by both the Monetary and Fiscal policy. The Financial crisis started when the US government housing policy reduced its underwriting standards, and gave sums of money into the housing market, this started as early as mid-90s, which was aimed to encourage more home ownership for both low and moderate income earners Citizens of America.
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- Agrees with the policies the federal reserve and government have enacted to protect consumers from shady and unethical business practices.
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- Explains that moral hazard and cheap credit allowed investment banks to go make deals using leverage. leverage is borrowing money to amplify the outcome of a deal.
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- Explains that the banker now wants more profits and calls the mortgage lender to find more homeowners. the only issue is that all of the qualified homeowners have homes.
- Explains how the subprime mortgages became colossal when investment bankers began to own more homes and bring in less mortgage payments.
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In this essay, the author
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- Analyzes how the impact of asset support programs on the u.s. fed's balance sheet ballooned to the tune of $2.239 trillion.
- Explains that the u.s. aggregate chain weighted gdp fell from $13.391 trillion at the end of 2007 to $12.901 trillion as of june 2009. the recession ended in q2 as the economy finally began to grow.
- Explains that since mid-2007 corporate profits fell dramatically as the decline began before the official start of the recession. in 2008 corporations really felt the pinch, especially during q4.
- Explains how the dramatic fall-off in earnings coupled with the collapse in credit markets filtered its way through the employment sector as companies fired millions of people as they shut down production and shuttered divisions.
- Analyzes how the decline in the corporate sector led to the destruction of the consumer sector as unemployment soared to levels not seen since the early 80s. in november, home foreclosures rose 18.4% yoy to 306,627.
- Opines that while the events leading up to the housing led global financials crisis will be studied and analyzed for years to come, the question now turns to recovery.
- Explains that the shape of the expected recovery has been described in many ways.
- Opines that the economic recovery could stall in q3 & q4 as inventory restocking and monetary/fiscal stimulus begins to fade.
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- Concludes that most asset classes have made a remarkable recovery after the lehman bankruptcy. markets are discounting mechanisms where investors value assets today based on future economic activity.
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998 wordsRead More - U.S. Economic Crisisexplanatory essayIn which, that led to the whole real estate bubble to bust due to the U.S Market thanks to the securitization and the supply response of financial assets to the demand of such assets according to stock-market investors.com.
In this essay, the author
- Explains that the united states is currently experiencing the biggest financial crisis after the great depression. they will discuss the relationship between mortgages, the housing crisis and wall street.
- Explains that the current economic crisis started from the real estate market, focusing on subprime mortgages and lenders that loaned money to high risk borrowers.
- Explains the relationship between mortgages, the housing crisis and wall street. the decline in housing prices led to rising defaults among subprime and alt a borrowers.
- Explains that fiscal policy is the government expenditure and revenue collection to influence the economy before the current economic crisis.
- Explains that the economy of the united states is the world's largest and its gdp is comprised of consumption, investment, government spending and net export.
- Explains the different types of unemployment, including frictional, structural, demand-deficient, cyclical, and seasonal. unemployed works have no job, while underemployment involves underutilization of a working individual's skills.
- Opines that the economy is at its worst since the great depression and the government needs to make drastic cuts with spending and stop importing cheaper goods.
871 wordsRead More - Monetary Policies in the US and Japananalytical essayGoodfriend M. 2002. The Phases of US Monetary Policy: 1987 to 2001. Federal Reserve Bank of Richmond Economic Quarterly Vol.88/2
In this essay, the author
- Compares the us and japan's monetary policies during the recession in 1990s, and argues that the success of the fed can be attributed to good luck from supply-side economics.
- Explains that the gulf war, led by the us against iraq, had severe consequences for the u.s. economy. the ground war lasted only 100 hours and resulted in uncertainty and upsurge in oil prices.
- Explains the fed's response to stimulate a weak economy by conducting expansionary monetary policy, which resulted in decrease in interest rate and increase in investment.
- Explains that the u.s. monetary policy was successful in averting recession in the beginning of 1990s.
- Analyzes how mankiw argues that the success of the fed was just a piece of luck arising from supply-side economy. the gulf war resulted in energy supply shocks, which were easy to deal with.
- Explains that the fed's success during the recession can be explained by the fact that policymakers were able to avoid spiraling inflation.
- Explains that economic recession in japan in 1990s was characterized by protracted deflationary slump, which is a continuous negative inflation.
- Explains that the boj implemented expansionary monetary policy in the beginning of 1990s to stimulate the economy by decreasing the interest rate.
- Explains that japan's gdp growth has been declining since 1990, although there was a positive trend between 1993 and 1996. figure 3 depicts the inflation rate trend in japan from 1980 to 2000.
- Analyzes how japan's inflation rate fluctuated between negative and positive 2 percent since 1992. the expansionary monetary policy implemented by the boj failed to combat the deflation and stimulate the economy.
- Explains that the failure of the boj in implementing expansionary monetary policy raises an interesting question.
- Analyzes how meltzer's (1999) analysis of the us monetary history between 1914 and 1950 supports the above argument.
- Illustrates that money and quasi money growth rates between 1990 and 1995 were on average nearly 3%, and narrow money was 5.45% for the same period. japan should have focused on money supply directly rather than on interest rates.
- Concludes that the question of impotency of the monetary policy remains open.
- Cites ahearne, gagnon, haltmaier, and kamin's preventing deflation: lessons from japan’s experience in the 1990s.
- Cites king, m., mankiw g. and powell, b.
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