Question

What is the difference between the FED’s policy before the Great Recession and the FED policy after the Great Recession

Answer 1

FED's policy before the Great Recession :-

Federal reserve actions in the run up to the great depression were important in hastening the decline in economic conditions. The speculative effects of the market boom in 1928-29 caused the FED to increase interest rates to curtail the bulish trend. While this policy action damped excessive borrowing to finance stock purchases, it also brought unintended consequences. Capital spending (for example for equipment and infrastructure) slowed dramatically in many sectors of the economy, leading a drop in industrial production and output growth . The infamous stock market collapse in oct 1929 finally ground the economy to a halt and a depression hit with full force soon after. In early 1930's, continued policy missteps by the Fed significantly lengthened the depression. Specifically, the Fed failed to prevent four massive banking panics from battering the economy in 1930-33.However, FED policy at that time dictated that only banks with sufficient collateral or member banks of Federal Reserve System were eligible for these funds. Consequently, cash-starved banks failed in large numbers.

FED's policy after the Great Recession :-

Fed policies implemented during the 2007-09 Great Recession were marketdly different from those during the great depression. When the recession began, the Fed acted decisively to stave off the collapse of the financial sector. Specific policies included decreasing the federal funds rate to nearly zero percent and establishing programs that lend money to banks on a short- term basis. Through an expansion of its balance sheet, the Fed also facilitated the scale of distressed investment bank Bear Stearns to a commercial bank, In addition, to reduce the risk of deflation that devastated the economy during the depression, the Fed made large-scale purchases of treasury bonds in two rounds of quantitative easing.

During the 1930's, inadequate Fed policy compounded the downward slide in the economy. This experience served as a wake-up call for the Fed, however, resulting in more assured policy measures that prevented the meltdown of financial markets during the Great Recession.