An Eventual Explosion Caused by the Federal Reserve's Quantitative Easing Program

Our economy is a machine that is ran by humans. A machine can only be as good as the person who makes it. This makes our economy susceptible to human error. A couple years ago the United States faced one of the greatest financial crisis since the Great Depression, which was the Great Recession. The Great Recession was a severe economic downturn that occurred in 2008 following the burst of the housing market. The government tried passing bills to see if anything would help it from becoming another Great Depression. Trying to aid the government was the Federal Reserve. The Federal Reserve went through a couple strategies in order to help the economy recover. The Federal Reserve provided three major strategies to start moving the economy in a better direction. The first strategy was primarily focused on the central bank’s role of the lender of last resort. The second strategy was meant to provide provision of liquidity directly to borrowers and investors in key credit markets. The last strategy was for the Federal Reserve to expand its open market operations to support the credit markets still working, as well as trying to push long term interest rates down. Since time has passed on since the Great Recession it has been a long road. In this essay we will take a time to reflect on these strategies to see how they helped.

On October 3, 2008 President George W. Bush signed the Emergency Economic Stabilization Act of 2008, otherwise known as the “bailout.” The Purpose of this act was defined as to, “Provide authority for the Federal Government to purchase and insure certain types of trouble assets for the purpose of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes” (Emergency Economic Stabilization Act). In my paper I will explain and show the relationship between the Emergency Economic Stabilization Act of 2008 and subprime lending, the collapse of the housing market, bundled mortgage securities, liquidity, and the Government 's efforts to bailout the nation 's banks.

As the onslaught of the sub-prime mortgage crisis began in late 2007, the housing market plummeted sending the economy into what is now known as the Great Recession. The Federal Reserve, as well as the private and government sectors, quickly took notice. In November of 2008 the Federal Reserve undertook its first trimester of quantitative easing; which means the Fed began purchasing treasury securities to increase the money supply in the system, with the hopes that the increase in assets would encourage lending and investment, leading to a resurgence of the economy in terms of unemployment rates and GDP. As time progressed the Fed continued to implement quantitative easing into its third trimester due to a lack of sufficient results.

In the event that the American individuals really saw how the Federal Reserve framework functions and what it has done to us, they would be shouting for it to be nullified promptly. It is a framework that was composed by global brokers for the advantage of worldwide investors, and it is methodically devastating the American individuals. The Federal Reserve framework is the essential motivation behind why the cash has declined in worth by well more than 95 percent and the national obligation has become more than 5000 times bigger in the course of recent years. The Fed makes the "blasts" and the "busts", and they

All day and all night, they battled the emergency with each instrument available to them to keep the United States and world economies above water. Working with two U.S. presidents, and under flame from a crabby Congress and an open angered by conduct on Wall Street, the Fed—nearby associates in the Treasury Department—effectively settled a wavering monetary framework. With inventiveness and definitiveness, they kept a financial fall of incomprehensible scale and went ahead to create the strange projects that would resuscitate the U.S. economy and turn into the model for different nations. Rich with detail of the basic leadership prepare in Washington and permanent representations of the real players, The Courage to Act relates and clarifies the most exceedingly bad budgetary emergency and monetary droop in America since the Great Depression, giving an insider 's record of the approach reaction (http://www.forbes.com/sites/richardsalsman/2012/03/06/five-financial-reforms-that-would-prevent-crises-and-promote-prosperity/#).

The Courage to Act memoir is essential reading for people who wants to know what happened at Federal Open Market Committee meeting on Aug. 5, 2008. It invokes comparisons to the Great Depression and at the same time suggests that Shucks, it was not all that great, was not a depression or anything (Bernanke). But Bernanke is persuasive in arguing that it was pretty damned high i.e. terrible and he and his members at the Fed deserve credit for the fact that it wasn 't a heck of a lot greater. Bernanke pulls back the curtain ornament on his endeavors to keep a mass commercial disappointment, working with two U.S. presidents and utilizing each Fed ability, regardless of how arcane, to keep the U.S. economy above water. His encounters amid the underlying emergency and the Great Recession that took after giving audience members a unique point of view on the American economy since 2006 and his story will uncover surprisingly how the inventiveness and definitiveness of a couple of famous pioneers kept a financial fall of unimaginable scale. The Act provide a means of different points in the banking factor by a central banking system. The Courage to Act explains the worst financial crisis and economic recession in America since the Great Recession, providing an insider 's account of the policy response.

In his new journal, The Courage to Act, Bernanke sets out a comprehensive record of his activities amid his eight years as administrator, basically contending that, had it not been for the intercessions the Fed inevitably championed, America 's destiny would have been inestimably more terrible. His book is a method for securing his legacy even with exaggerated cases — from the right, that his intercessions, for example, quantitative facilitating, gambled touching off expansion and slamming the dollar; and, from the left, that the official reaction did much to Wall Street and little for normal Americans. Bernanke subtle elements the obstacles he confronted, from pessimistically obstructive congressmen to obstreperous controllers and factious loan fee birds of prey, and in addition hapless policymaking in Europe. Amid a great part of the frenzy, he composes: "The Fed alone, with its biting gum and baling wire, bore the weight of fighting the emergency."

The unprecedented government intervention during the massive economic crisis of the late 2000’s was met with varied sentiment of economists (Lee, 2009). For example, economist Marci Rossell felt that government intervention was arbitrary and lacked clarity as to which firms would receive government aid (Lee, 2009). She furthered her argument by stating that if the government bailed out homeowners and banks that were borrowing and lending “over their heads,” they were creating a dangerous precedent to set (Lee, 2009, p.40). However, Rossell praised the Obama administration for having a clear grasp on the economic situation and trusted in this administration’s guidance to recover from the economic crisis. Conversely, economist Steven Schwarcz said that though the government bailout in 2008 would cost more than it would have if the government had reacted more swiftly to early signs of recession, these institutions would collapse and fail without government aid (“How Three Economists,” 2008). If these institutions failed, the ripple effect of this failure to the U.S. economy would be irreparable.

Couple years after he became the chairman of the Federal Reserve of the United States, Bernanke had the responsibility to fix the financial mess caused by Wall Street. The rest of the world was watching carefully what was going on with our economy. Central Banks’ leaders of the world knew that if anything were to happen with the U.S. economy could start a domino effect. Once everything blew up (stock market started to crash, companies going out of business, unemployment at 17% and etc.) and Ben saw how big the damage was, he tried to remain calm. One of his first conscious decisions during the crisis was to avoid the mistakes made by 1930s’ bankers. Bernanke was very critic of some the decisions made then and he stated that “not only their stingy refusals to supply cash and also their inflexible inside-the-box thinking(Time).” One of the things he Bernanke did to help our weak economy was to lower the interest rates. In addition to that, he also took unprecedented steps to implement quantitative easing, a process whereby the central bank purchased billions of dollars of mortgage-backed securities and long-term treasuries to stimulate the economic growth. As he did that he was very criticized by the media and some economists. Some of the criticisms he and the Fed had during that time was why they were bailing-out companies from handing out lucrative dividends and

In 2008, the US experienced the traumatic chaos of a financial downturn, whose effects rippled throughout Europe and Asia. Many economists consider it the worst crisis since the Great Depression, and its alarming results are still seen today, a long six years later. Truly, the recession’s daunting size and formidable wake have left no one untouched and can only beg the question: could it have been prevented? The causes are manifold, but can be found substantially rooted in illogical investments and greedy schemes.

As interest rates bottomed out quickly after the onset of the recession, the Federal Reserve could no longer stimulate the economy with traditional and time-tested techniques. The controversial and unconventional method chosen by the Federal Reserve, and other central banks around the world, is known as “quantitative easing” (QE). QE functions by injecting large amounts of reserve capital into commercial banks with the hope that those banks will then be willing to lend the money at affordable interest rates. Ideally, the addition to economic activity affected by the influx of capital to banks should keep the value of the dollar relatively low, avoiding deflation and encouraging foreign investment by those wishing to take advantage of an affordable dollar. The cheaper dollar should also make American exports look more attractive to potential consumers in other countries. If interest rates stay low, and banks begin lending again, consumer and investor confidence should hopefully rise, leading to more spending and thus, economic growth.

Therefore, the quantitative easing adopted from 2009 was trying to gradually resume sustainable economic growth. Quantitative easing has helped to avert what could have been a second great depression (Wall Street, 2011). The US economy has been clawing its way out of the recession in 2009 and recovery has been slow compared to previous economic cycles. Regular review of the pace of securities purchase by the Federal reserve and the overall size of asset-purchase program in light of incoming information and adjusting the program as need be will help foster maximum employment and price stability.

As a consequence of the 2008-2009 global financial crisis, both the US Federal Reserve and European Central Bank have pumped trillions of cashes into their own economies (known as QE, Quantitative Easing) by purchasing government bonds and securities. Exhibit 3.1 and 3.2 indicate that the total assets of both the Federal Reserve and European Central Bank had increased significantly over the years since the GFC broke out in mid-2008.

The current crisis is catalyzing an array of responses, including searching for causes, reworking regulations, scapegoating and a massive capital injection. Without a clear understanding of the cause, the remedies may do more harm than good, innocents may be scapegoated, and valuable progress in financial tools may be lost. Worse, it will happen again. From a simple mathematical model of the underlying economics, I first predicted this crisis in July of 2004. Economic dynamic relating very low interest rates to the structure of the demand curve in the housing market made this outcome foreseeable, indeed inevitable. The current crisis had a mathematical cause. There isn’t space here for full explanations; see

Following the economic slump of 1923, there was a voluminous printing and distribution of money to it, the concept of quantitative easing at play. The term quantitative easing refers to an unconventional monetary policy instituted by some central bank so as to stimulate the economy. This is usually stimulated by the failure or ineffectiveness of conventional monetary policies. It involves the buying of government bonds by the central bank as well as other financial assets using new money that the bank has not like in 1023 through printing but electronically created. The idea behind the move is to increase the money supply as well as the excess reserves at the same time of the