Question

- Discuss the advantages and disadvantages of having a large cap and large access regarding the reverse repo facility. Be as specific as possible making sure you refer to what may happen if we enter into another financial crisis.

- You were studying with a friend and you were discussing the Ben Bernanke with the fire hose full of reserves analogy. Your friend was arguing that the retention pond that collects all, or pretty much all the excess reserves that the Bernanke Fed injected into the economy (through 3 round of quantitative easing) was equivalent to the reverse repo facility. That is, the reverse repo facility was created to capture these excess reserves. Was your friend right or wrong? If wrong, please correct him/her explaining what the retention pond is and how it differs from the reverse repo facility. Be sure to explain the purpose of the retention pond and the reserve repo facility in context of monetary policy... i.e why was the retention pond and reserve repo facility create exactly in the first place?

- Suppose you were the Fed Chairperson and you were giving a testimony in front of Congress. During the question and answer period following your testimony a senator was criticizing you, and the Fed in general, for paying taxpayer money to private money market funds. What is this senator talking about (why are these tax payers funds?) and what would be your defense for paying these private money market funds taxpayers money? Defend the Fed! Be sure to refer to the size and importance of the repo market. Why might it be harder to defend the Fed as we move into the future?

Answer 1

Hi,

At the time of big recession -2008 many big market player became bankrupt and many big brands was near about bankruptcy.

That time government and apex financial institution has injected them by bailout package.It was only a temporary solutions.

The big reasons of this financial failure was failure of financial principles.When everything was well that time financial institutions distribute money as a ice cream to every one.

Same time the whole economic system were following free capitalism policy or system. Interference of state was nothing.

When recession spread globally then automatically purchasing index was continuously decreasing,unemployment rate was increasing, stock market had already crashed.Then government become actively involved in this picture and became a social state from free capitalism state.Apex banks decreased fed rate and the state started the bail out packages.The main reason of this interference was to protect the company from bankruptcy and increase the flow of cash in the economy.

But same time the financial institution did not restructure there policy and strategies.They did not reform there self .

At the same time the cash increased in the system but employment generation,production level,government deficit,debt burden had became a big problem for economy. Interest rate touched the level of zero in the developed nation.

As a fed chairman my opinion will be bail out package or infusing money in the system was not totally a wrong decision for economy. It was a big demand of that time for protecting to the nation,companies and over all economic credibility, but at the same time a financial institution must should be follow and new norms and the standard or principle of finance.

It will be continuously withdraw from the economic system with the improvement of the economy.