Question

The Federal Reserve has a variety of responsibilities and goals. Choose one of these responsibilities or goals and explain it in more detail (e.g. explain what it means to be a "lender of last resort"). Finally, give your opinion on whether the Federal Reserve should have that responsibility or goal, and whether their authority over that responsibility or goal should be expanded, diminished or remain as it is and explain why. Include a detailed and accurate application of one or more of the concepts regarding the federal reserve responsibilities and goals.

Answer 1

The U.S. Federal Reserve as the “lender of last resort” extends credit to financial institutions unable to obtain credit elsewhere.

The Federal Reserve in the United States serves as the lender of last resort to those organizations that are unable to acquire credit elsewhere and whose crash would have severe economic consequences. It took over this position from the "clearing houses" of the private sector that worked during the Free Banking Age; whether public or private, the liquidity availability was designed to avoid bank runs.

The Federal Reserve has the power and economic resources to act as a ' lender of last resort ' by extending credit to depository organizations or other entities in uncommon situations involving a domestic or regional emergency where inability to acquire credit would have a serious negative effect on the economy. Through its discount and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is the discount rate

The Fed acts as a buffer against unexpected daily changes in reserve demand and supply by creating these loans. This contributes to the efficient operation of the banking system, relieves stress on the reserve market and decreases the magnitude of unexpected interest rate movements

The Federal Reserve System ‘s role as lender of last resort has been criticized because it shifts the risk and responsibility away from lenders and borrowers and places it on others in the form of inflation.