The Global Financial Crisis and Its Impact

Using quantitative easing has helped the recovery of the USA and other developing countries. The Fed’s then limited their ability to pursue more measures, but congress ignored those appeals to help support the economy. The Fed’s decided to use smaller steps to help investor expectations and to prevent a possible financial crisis in Europe. In 2011 it was announced that the FED’s would hold short-term interest rates close to zero percent through 2013; to help support the economy. Soon after it was announced that using the “twist” operation would push long-term interest rates down, by purchasing $400 billion in long-term treasury securities with profits from the sale of the short-term government debt. Inaugurating a policy to help shape market expectations, which will raise interest rates at the end of 2014.

The United States Federal Reserve has been conducting open market operations in the financial markets since 2008 in order to drive down interest rates and promote economic growth following the 2007-08 financial crisis. The subsequent recession, dubbed the Great Recession, destroyed $19 trillion in household wealth and nearly 9 million jobs. The highly controversial quantitative easing (QE) program, which refers to the process of introducing new money into the money supply, has been effective in promoting US recovery over the past six years.

A monetary policy was also implemented to fight the Great Recessions, Traditionally the monetary policy could not be implemented since the Federal Reserve has a Zero Bound Problem. This meant that the interest rates were already set at 0 by the central bank and could not be lowered any further since a negative figure would lead to a non-investment (Hetzel, 2012). The Federal reserve instead developed a monetary policy by the name Quantitative Easing to try and reduce the effects of the recession. QE was implemented by the federal reserve by buying assets, for example, they bought cooperate bonds from banks for cash in order to add more supply of money in the economy. In a normal case, the federal government would purchase the bonds from individual to increase money but during a recession the no private bonds available for purchase. Therefore, the federal government is forced to buy other assets.

Quantitative easing uses money as a means of payment. It is used as a tool of monetary policy when the other tool of monetary policy which is interest rate is near zero and not increasing. Monetary policy concerns the way in which government actions shift how money is used.

The Federal Reserve’s (Fed) Quantitative Easing (QE) refers to easing the market situation by quantity. QE is a monetary policy used to stimulate the United States’ economy by injecting money into the market. The policy was done by the central bank that prints money to buy the government bonds from financial institutions. Other than that, the Fed also set the interest rate to be between zero to a quarter percent to encourage the public to borrow money from local banks. The economists hoped to boost the economy by increasing the investment.

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.

The global financial crisis (GFC) is begun with the collapse of Lehman Brothers in Sep. 2008, when a loss of confidence in stock investors of the value of sub-prime mortgages caused a liquidity crisis, resulting the global central banks injecting a large amount of capital into the financial markets and consumers ' confidence hit the bottom, according to McKibbin, W.J. (2009, p.1).

The Global Financial Crisis, also known as The Great Recession, broke out in the United States of America in the middle of 2007 and continued on until 2008. There were many factors that contributed to the cause of The Global Financial Crisis and many effects that emerged, because the impact it had on the financial system. The Global Financial Crisis started because of house market crash in 2007. There were many factors that contributed to the housing market crash in 2007. These factors included: subprime mortgages, the housing bubble, and government policies and regulations. The factors were a result of poor financial investments and high risk gambling, which slumped down interest rates and price of many assets. Government policies and regulations were made in order to attempt to solve the crises that emerged; instead the government policies made backfired and escalated the problem even further.

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 Global Financial Crisis (GFC) began in July 2007 in the United States (US) following the decline in the countries already poor credit ratings and the subsequent collapse of the US housing market and prominent investment bank Lehman Brothers which sent a wave of fear around global economies including Australia and resulted in the largest drop in global economic activity in the modern era. (W. McKibbin, A.Stoeckel, 2009, pg 1).

The Global Financial Crisis (GFC) is considered by many, particularly economists, to be the most disastrous financial crisis since the Great Depression back in the 1930s. It was the systematic collapse several large financial institutions based on Wall Street triggered by the housing bubble burst, followed by immense market value drop in the Dow Jones and the US dollar. This led to a massive financial bailout carried out by the US government, called the Emergency Economic Stabilization Act of 2008, valued at up $700 billion dollars. This financial crisis, which occurred from 2007 to 2008 lead to the global recession, also known as the Great Recession which went on from 2008 to 2012. The effects or more specifically the financial effects that the Global Financial Crisis of 2007-2008 were many, all of which will be discussed in this analysis later on. But more importantly, were the factors involved which contributed to this financial crisis.

The Global Financial Crisis has had a huge impact on the global economy. The American housing market collapses, the house price drops significantly and the bank is losing lots of money, however, people are not pursued in court for money or declared bankruptcy. People tend to spend less on the due to their houses worth less than the bank has loaned originally and some of them are still committed to clearing off their mortgages. This causes less activity in housing market and sales market, hence more people lose their jobs which means the unemployment rate increases, and the American economy recovers slowly.

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.

This situation is called “liquidity trap” and happens while there is a deflation or really low inflation. (Giraud 2010) Then central banks ask the Quantitative Easing for help by buying a pre-determined amount of government bond and assets from private institutions. The purpose of this unconventional strategy is to inject money into the economy directly to boost growth rather though reduced interest rate, which already cannot be any lower. (Plosser 2009)

“Quantitative easing” refers to an unorthodox monetary policy where a central bank would buy bonds and premiums to stimulate the economy when the nominal interest rates are near or at zero. Since nominal interest rates cannot technically go below zero, this is done by pumping liquidity into the economy so that asset prices would inflate. This technique had originated in the Bank of Japan (BOJ) during the early 2000s as an attempt to revive Japan’s stagnant economy. The United States Federal Reserve had implemented several plans similar to that of the BOJ after the 2008 financial crises, and continued until late 2014. Quantitative easing should not be put into effect again because it has not significantly affected the economy positively in the first place, it also risks hyperinflation, and if anything, it should be used only as a measure of last resort.