The Financial Crisis of 2007-2008 and The Federal Reserve

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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.
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