The Bank of England and The 2008 Financial Crisis Essay

In 2008, the world experienced a tremendous financial crisis which rooted from the U.S housing market; moreover, it is considered by many economists as one of the worst recession since the Great Depression in 1930s. After posing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It brought governments down, ruined economies, crumble financial corporations and impoverish individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brother and AIG. These collapses not only influence own countries but also international area. Hence, the intervention of governments by changing and

Given its mandate to maximize employment and maintain price stability, the Fed took monetary policy actions in December 2008 to keep long-term interest rates at near zero (between 0.0% and 0.25%) to help stabilize and revive the U.S economy -- leaving no option for further interest rate reduction.

What will happen if the Federal Open Market Committee brings back up the interest rates that have been down? Since the interest rates have been down, great things for businesses and employment have been happening. If interest rates go back up, corporate finance is going to be challenged.

Primarily, you must understand that lowering the rate of interest will make it cheaper for people to borrow as well as make it cheaper to pay back existing loans. As a result, firms may use this money that they have saved to spend on upgrading the

The federal reserve system creates economic growth and stability. Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, stated in a speech at the World Affairs Council of Philadelphia saying, “[The] Federal Reserve's goal [is] of maximum employment and price stability, and, as I will explain, there are good reasons to expect that we will advance further toward those goals.” This being said, fluctuations in the interest rate causes adverse condition. When the interest rate goes down, it increases the money supply by making money less expensive, which allows member banks to borrow more money. When the interest rate goes up it decreases the money supply by making money more expensive, which in turn discourages borrowing and spending, slowing down the economy. Continual rate changes affect the entire economy. High interest rates causes the government to be limited in creating programs without the aid of the federal reserve. During the financial crisis, the Federal Reserve established several facilities to provide liquidity directly to borrowers and investors in key credit markets. As the production of financial markets enhanced, the Federal Reserve eased down these programs. In the attempt to dispense entrance to short-term debt funding, the Federal Reserve System effectuate a variety of crisis management

Obviously all of these factors can have some kind of effect on the economy. With cut backs comes a slowdown in output and production from businesses and can cause inflation to occur where people make the same or less amount of money but the price of goods goes up. Essentially, interest rates control the whole economy: if interest rates go up then the economy slows down and vice versa. However if interest rates go too low or stay low for a long period of time it can lead to inflation which also hurts the economy. In essence, higher interest rates are not necessarily a bad thing. Higher interest rates can curb inflation, meaning your pay will go further. A good example of this is the price of gasoline. When the price of gas goes up people drive less and spend less because more and more of their income goes toward fuel. When the price of gas goes down people have more money to spend. The increase in spending will be seen somewhere in the economy whether it is at the grocery store or online internet sales.

Rates on mortgages and other types of loans have been fairly low, creating more access to capital for businesses and making big-ticket purchases more affordable for consumers. If the FED raises the interest rate it will have several effects on the consumer. It will reduce their purchasing power and consumers shopping habits will be influenced. The decrease in purchasing power leads to a decrease in

As consumption is a component of AD, the AD curve will shift leftwards from AD1 to AD2.With inflation devaluing money, workers will likely ask for higher wages so that their real disposable incomes will be the same as previously before prices rose. This would also mean firms’ costs of production will rise causing the SRAS curve is shift leftwards, this will likely lead to a fall in investment from firms into research and development due to the lack of business confidence, so less new products will be created and produced, potentially slowing down economic growth. This will shift the LRAS curve and AD curve leftwards, as investment is a component of AD and economic growth is represented by LRAS (factors of production).

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.

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.

The 2008 financial crisis can be traced back to two factor, sub-prime mortgages and debt. Traditionally, it was considered difficult to get a mortgage if you had bad credit or did not have a steady form of income. Lenders did not want to take the risk that you might default on the loan. In the 2000s, investors in the U.S. and abroad looking for a low risk, high return investment started putting their money at the U.S. housing market. The thinking behind this was they could get a better return from the interest rates home owners paid on mortgages, than they could by investing in things like treasury bonds, which were paying extremely low interest. The global investors did not want to buy just individual mortgages. Instead, they bought

In my opinion, how effective low interests rates are to encourage consumers to borrow and spend depends on the elasticity of the demand for loans. If the demand for loans is inelastic, a sharp reduction in interest rates will only increase the loans by a small amount. Please refer to Appendix G. In this case, lowering the interest rates to 0.5% is not enough to stimulate demand. As a result, quantitative easing, another monetary policy is being utilized, as bank rates could not go any lower. Although there are other underlying factors that contribute to the high unemployment rate in the UK, it is shown that reducing bank rates is not the key to solving this problem.

Lowering interest rates is an effective way to stimulate and improve the economy. When rates are lower, it is easier and more affordable to borrow money. This encourages spending and investment, both which help propel the economy forward.

QE abbreviated as Quantitative Easing is the process that central banks use to stimulate the economy when all the traditional approaches prove to be ineffective. This is generally done by buying specific financial assets from other commercial banks and financial institutions ultimately leading to increase in the monetary base and reducing the yield of those assets. This is generally used to ensure that the inflation does not go below a specific rate. Some of the risks involved are resistance to deflation to a longer time or making bank to resist lending out their additional reserves (Arvind K, Annette V, 2011).

In September 2008, thousands of financial sectors all over the world went bankrupt like dominoes after the failure of Lehman Brothers Bank, which is also known as the Financial Crisis of 2008, caused the severe recession of the economies around the world. In order to help the country out of crisis, the central banks in different countries had to take measures to stimulate the growth of economy. The goal of this essay is to introduce the measures that Bank of England have taken in 2008 of financial crisis and will discuss the macroeconomics consequences and effects. Three measures taken by Bank of England will be presented in first section and how macroeconomics outcomes influenced by policies and objectives will be discussed in the second section.