Question

Using t-account, explain what are differences between Federal Reserve policy in crisis time and in normal times.

Answer 1

In crisis time , Federal Reserve Policy is dramatically different from normal time . The Federal Reserve's responsibilites as the nation's central bank fall into four main categories : monetary policy , provision of emergency liquidity through the lender of last resort function , supervision of definite types of banks and other financial firms for well-being and soundness , and amenities of payment system services to financial firms and the Government .

The 2007-2009 financial crises was the worst crisis ever since the Great depression , freezing virtually all the parts of financial system . In the time of crisis the federal reserve policy would have been creep out on a long limb had it rescued Lehman without apporoval from theTreasury ; so the US Treasury shares the blame . There was legitimate have to do with about how much good collateral Lehman could have posted to reliale Federal Reserve loans under section 13(3) ; but on the other hand , the Fed was the legal judge of that . The Fed and the Treasury endeavoured hard , right-up to the last minute , to broker a “private sector solution” whereby some other large financial institution (Bank of America? Barclays?) would buy Lehman. Once push came to shove , they did not view Lehman as a good time to teach a moral hazard lesson , even though Treasury Secretary Henry Paulson had put forward as much earlier. All said that , If the Fed and the Treasury had perceived how terrible things would get if Lehman were allowed to fail , it seems that the central bank could have labeled enough of Lehman’s collateral as “good enough” to give reasons for the imperative loans much as it had done for Bear Stearns (using J.P. Morgan as a vehicle) fair-minded six months earlier .

After the ending of crisis , there are many changes shown like , markets may have viewed like a whitewash , concluded that the problems with the big banks were far depper than suspected . It was very difficult to manage the losses and to manage all the pending situations or works . After the crisis , When open-market operations are conducted at the zero lower bound , the federal funds rate can't fall any further . The first-concern to the stress tests , the Fed and other bank dampers in effect never released information about the circumstances of specific banks . That was considered highly self-assured.

During the time of crisis unemployment is a vital problem . But after the crisis is a vital problem . But after the crisis it recovers gradually . After the crisis monetary policy is considered as expansionary and is being coupled with a stimulative fiscal policy .