Summary: The 2007 Global Financial Crisis

Akram: The fed decreased the interest rate by increasing the buying of bonds. From 2008 to 2014 the fed increased spending from 900

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.

Over the past decade, the Fed has responded fairly to inflation and unemployment. According to the Federal Reserve (2017), between late 2008 (the era of the Great Recession) and October 2014, the Federal Reserve purchased longer-term mortgage-backed securities and notes issued by certain government-sponsored enterprises, as well as longer-term Treasury bonds and notes. In essence, lowering the level of longer-term interest rates and improving financial conditions (the Fed.com, 2017).

As Wolfers acknowledges in his article, if the economy of the United States enters into a recession, the Federal Reserve System cannot use their usual solution of decreasing interest rates to energize the economy. It is because they already have interest rates set nearly as low as they will go, thus not giving policy makers much room to

The 2008 Great Recession helped in restoring economic growth and lowered unemployment. Both fiscal and monetary policies are related ways use to increase the aggregate demand and aggregate supply. So, a shift in the aggregate demand curve to the right is expansionary fiscal policy meaning government spending has to exceed (2012). The G- component aggregate demand help to spend, allowing the C- component of aggregate demand to increase. On the other hand, the monetary policy promotes spending, investments, and lending increasing aggregate demand. During the downturn, the systems concentrate on growing demand total while the supply strategy looked for long-term growth in productivity and efficiency (Pettinger, 2012).

The financial crisis that happened during 2007-09 was considered the worst financial crisis in the world since the great depression in the 1930s. It leads to a series of banking failures and also prolonged recession, which have affected millions of Americans and paralyzed the whole financial system. Although it was happened a long time ago, the side effects are still having implications for the economy now. This has become an enormously common topic among economists, hence it plays an extremely important role in the economy. There are many questions that were asked about the financial crisis, one of the most common question that dragged attention was ’’How did the government (Federal Reserve) contributed to the financial crisis?’’

The Fed Reserve Bank (the Fed) uses monetary policy response work with open market operations to effect interest rates, however, during the financial crisis, the Fed used the unconventional monetary policy of quantitative easing to lower interest rates nearly to zero, by increasing the money supply. The Fed response was a way to stimulate the economy, it was not an attempt to stabilize it. This drawing down of interest rates was with the goal to stimulate the economy. This worked through by increasing the money supply allows

The Federal Reserve went into action in response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The results of the rate changes caused what is called “zero bound”, this reduced the effectiveness of monetary policy with the near non-existence of interest rates.

Having a president who has businesses that have filed for bankruptcy 6 times does not bode well for the success of our economy. Additionally, Trump will be taking possible moves on selecting CEOs from Wall Street by taking control of the American Treasury. The financial crisis in 2008 had made the public lost their trust on Wall Street. Giving the CEOs power, reveals peoples’ trepidation of the crisis that might happen once more.

This has the effect of bringing down interest rates, injecting money into the economy, and thus encouraging borrowing and spending. However, when interest rates are at or near zero and the economy still requires stimulus (a dangerous situation now referred to as a “liquidity trap”) (Blinder 466), central banks must use more extreme methods to resuscitate the economy.

Monetary policy effects the GDP inflation. “Between 1996 and 2000, real GDP in the United States expanded briskly and the price level rose only slowly. The economy experienced neither significant unemployment nor inflation. Some observes felt that the United States had entered a “new ear” in which business cycle was dead. But that wishful thinking came to an end in March 2001, when the economy entered its ninth recession since 1950. Since 1970, real GDP has declined in the United States in five periods: 1973-1975, 1980, 1981-1982, 1990-1991 and

The four areas of Interest and Capital we are going to look at are: higher interest rates with more capital invested, lower interest rates with less capital invested, lower interest rates with more capital invested, and higher interest rates with less capital invested. Interest rates are a critical tool of monetary policy and are taken into account when working with factors such as unemployment, inflation, and investments (Skousen, 2014). In the first scenario, we are looking at an outward shift in the demand for capital occurs in an economic boom when increased construction of plants, building, and other capital-intensive business activities requires huge outlays of investment. In this situation, interest rates tend to rise along with capital invested. (Skousen, 2014) The US economy began getting stronger in the early 1980s, it’s steadiest growth since the 1960s. This was in large part due to the Federal Reserve analyzing the economy and raising interest rates when it thought the economy was weak then plunging when they thought the economy was too strong. (Krugman, 1991). During this period, capital investment was at an all-time high, largely due to a banking industry deregulation. Financial institutions were attempting to take advantage of better returns on their investments due to the high interest rates. During this time the US markets had become attractive for external investing opportunities resulting in investing from external sources as well as from within the

Because of the extreme severity of the Great Recession in 2008, western central banks have since applied a series of unconventional monetary policies besides normal ones. One of the characteristics of the unconventional policies is the intended near-to-zero interest rates, so those policies are also named Zero Interest Rate Policies (ZIRP). ZIRP are designed to help the financial market escape from the “liquidity trap”, a situation in which normal expansionary monetary policies fail to decrease interest rates below zero and thus become ineffective. Without a doubt, ZIRP are necessary tools for policymakers to intervene in the financial catastrophe of 2008; however, even though the recession has officially ended in June 2009, ZIRP are still in effect now. The application of ZIRP in the US demonstrates the necessity of the Federal Reserve (FED) for both monetary and fiscal policies in the regulatory system. However, ZIRP are in fact encouraging institutions and individuals to seek risks rather than avoid them, and the accumulating dangers as a result make ZIRP necessary to protect the financial market and the US Treasury from greater destruction. Therefore, people are trapped in a downward spiral, and the exit and economic recovery are postponed.

Success of the Fed during the recession can also be explained by the fact that policymakers` were able to avoid spiraling inflation. Blanchard (1996) describes spiraling inflation as a situation when inflation becomes worse because of the interactive relationship between wages and prices. In other words, spiraling inflation occurs when increase in wages leads to increase in prices, and, increase in prices leads to even higher wages. Taking into consideration the fact that the U.S economy suffered from supply shocks, spiraling inflation was a possible outcome. To prevent the economy from such an “illness”, the Fed opted for responding to inflation more aggressively by adjusting rate of interest. Figure 5 provides response of federal funds rate to a 1-percentage point increase in core inflation (Mankiw, 2001). What we see is that in 1960s, 1970s, 1980s federal funds rate was less responsive to increase in core inflation when compared to that of 1990s. As a result, monetary policy in 1990s

This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of