The Financial Crisis of 2007-2008 and The Federal Reserve

analytical Essay
2612 words
2612 words

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 interaction between subprime mortgage problem and monetary factor.



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...

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...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.
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