The Lessons Of The Depression

1035 WordsNov 30, 20155 Pages
Ben Bernanke was quoted saying, “I think one of the lessons of the Depression - and this is something that Franklin Roosevelt demonstrated - was that when orthodoxy fails, then you need to try new things. And he was very willing to try unorthodox approaches when the orthodox approach had shown that it was not adequate.” Time and time again we have seen that when crises happen conventional wisdom about monetary policy and fiscal policy gets thrown out the window and replaced by emergency alternative policies. Before the financial crisis of 2008, the Fed’s uniform monetary policy was to bump a key short-term interest rate up to deter borrowing, and subsequently check inflation, or down to promote looser credit, and therefore spur economic…show more content…
Many economists have previously noted this correlation but this paper will further highlight that correlation by explaining in detail how these monetary measures work. The fiscal policy known as quantitative easing means that the government prints money to buy assets. This policy was first used by Japan in 2001, when they vowed to buy 400 billion yen of government bonds a month in hopes of raising the level of their reserves to 5 trillion yen. Since then, Japan, Britain, and America have all employed measures of quantitative easing in an attempt to recover their economies after the financial crisis of 2008. Through research conducted by several economists, they found that this measure works in a few ways. First, when central banks print new money and then buy bonds from investors, those investors use that newly printed money to enhance their portfolios by purchasing new assets with different levels of risk and maturity. When these investors buy new assets they help the economy by increasing asset prices and by decreasing interest rates. Since there is more demand and more purchases of bonds it allows the interest prices to decrease. Due to this decrease in interest rates individuals and businesses are more likely to invest their money. Second, the reduction in interest rates
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