Question

give your thoughts on what would have likely happened had there been no federal reserve after 9/11?

Answer 1

After 9/11, the very first temporary economic downturn was when the new york stock exchange and other financial markets closed for a week. Fearful of further attacks, people started their withdrawing money from the bank money started moving from illiquid assets to checking accounts.

The situation exacerbated by the reduction in consumption and investment and further the economic slowdown.

GDP forecast went down from 6.6 percent to 1.1 percent and for 2002 it went further down from 2.7 percent to 1.5 percent. Resources moved law enforcement and defense. Inflation in almost every sector like traveling and tourism reduced the quantity.

If there had been no federal reserve:

The fed provides liquidity. Bank and businesses urgently needed to make payments to firms and individuals. Firms buy and sell assets to makes payments. During times of crisis, however, banks avoid making such loans because falling asset prices threaten the value of the collateral. A domino chain of bankruptcies would happen if there's an interruption in lending to financial firms. Such an effect would completely jeopardize the economy through its effect on investment, including new homes and on durable consumer goods.

If the fed had not been at the cause the emergency relief provided by the federal reserve wouldn't have been there to rescue the economy from dying down further.

These are ways that wouldn't have happened in the absence of federal reserve:

• Fed's trading desk bought Treasury securities from US desk which provided liquidity to markets.
• Fed held $61 billion of securities, higher than any previous security purchases vs $12 billion a year earlier.
• It lent banks a direct discount window.
• Fed made additional funds available for the temporary liquidity problems of the banks.
• passively extended credit to the economy through its role in clearing checks.

So, if fed hadn't been there, the bank would have struggled to clear the payment checks, the downward spiraling economy would have had gotten worse if the fed didn't provide a discount window and the huge amount of funds pushed into the market.