Global Financial Crisis and the Fed’s Response
The Federal Reserve System is the principal institution that regulates and stabilizes financial systems. Though by the start of 2008, the Fed was in the frontline in ensuring that all financial crises were combated in the real economy and banking systems (Economic Education, 2017). Therefore, Fed formulated mechanisms towards overseeing the problem by use of unconventional measures and traditional tricks concerning monetary policies despite receiving a wide range of criticism. Hence, Fed incorporated tactics involving quantitative easing, ailing financial institution assistance, forward guidance regarding interest rates, and interest rate cuts. In the mid of doing this, the rate of unemployment accelerated, which led to the banks involving themselves in excessive charging.
At first, Fed saw it possible to curb the financial crisis by improving the rate of employment where he would boost the economy through reducing the interest rates, which would, in return, enable businesses to engage in new investments in all ways possible. The formula was informed by the fact that once inflation hits, the Fed would raise the federal fund’s rates, which would initiate higher interest rates leading to low spending (Yglesias, 2015). Though, despite all the efforts that the Fed put in place, the economy continued to deteriorate in that the Federal funds rate almost got to zero percent. In that case, the rate would not go below that level since now most people would result in massive withdrawal of cash, increasing the financial crisis since the rates cannot be pushed to be negative.
In my opinion, despite the financial crisis increasing while the Federal rates stood at Zero, there was nothing more to do and that Fed did all possible things to stabilize the economy, especially by trying to reduce the unemployment levels. As well, during the financial crisis, I have learned that financial institutions can go beyond the unknown to take risks in trying to save the financial crisis, thus leading to new bank crises arising. As well, I believe that policymakers need to work towards finding more stable mechanisms that will oversee issues concerning global finances.
References
Economic Education. (2017). Chairman Bernanke’s College Lecture Series. Available at: https://www.federalreserve.gov/aboutthefed/educational-tools/chairmans-lecture-series-about.htm (Accessed on April 11, 2020).
Yglesias, M. (2015). The Fed and the 2008 financial crisis. Available at: https://www.vox.com/2014/6/20/18079946/fed-vs-crisis (Accessed on April 11, 2020).