Thursday, July 30, 2015
Federal Reserve under Bernanke and Yellen and Great Recession of 2007-2009
Think about the last 5 years in which the Federal Reserve under Bernanke and Yellen have kept rates at historic lows and created massive monetary growth in hopes of creating a robust recovery from the "Great Recession" of 2007-2009
The recovery that actually is taking place is moderate/modest (their words)...why do you think this policy has resulted in that outcome?
The financial crisis of 2007-2009 was one of the most intense periods in the global economy. Not only the USA but also other countries felt the impact of it that resulted in the deep economic downturn. The US economy after the crisis could not find the way to the fully recover. The situation reminded Japan in the 1990s. There was no economic growth and inflation fell below the allowed 2% mark.
Therefore, something serious had to be done in order to stabilize the financial situation in the country. The Federal Reserve Bank had certain plan in order to make that happen. The monetary policy that it decided to implement involved low (near zero) short-term interest rates, which were supposed to promote the recovery from the recession. In order to decrease the long-term rates, Bernanke, the former Federal Reserve Chair, had the courage to challenge the recession and came up with an ultimate solution that seemed to be perfect at the time. He insisted to implement “quantitative easing” and purchasing large quantities of long-term Treasury securities and other long-term securities, which were guaranteed by organizations such as Freddie Mac, which were sponsored by government. The main reason behind lower rates strategy lays in the fact that lower rates are more helpful for both businesses and households because they help support asset values and lower borrowing costs. This strategy continued to be implemented under the new Chair, Janet Yellen.
The main idea behind this policy was that it would help increase the spending, which eventually lowers the unemployment rate by creating necessary jobs. Lower rates create more attractive and competitive loan options for individuals and businesses. There is a direct link between the economy and consumer spending; this is why I could understand why such strategy was proposed to help facilitate economic growth. In addition, if the Federal funds rate is low for a long period of time, it decreases the value of a dollar in the foreign markets. This means that it would be more costly to buy overseas products. This will encourage businesses to buy domestically, which in turn will infuse money into US economy. Spending is t he key to the growth.
If we look at the recovery process right now, it is considered be moderate. If the ultimate goal of the Federal Reserve to achieve maximum employment, stable prices, and moderate long-term interest rates, I do not see how these factors are getting any better, maybe only at a very slow pace. According to a research by Harvar’s Reinhart and Rogoff the full recovery can only be visible after the decade has passed. That’s why we only see the moderate pace of recovery now. Business owners are also a bit more cautious when it comes to hiring even though the profits are good. Another problem that would hold back the recovery is the aging baby-boomers population. The government will have to come up with extra funds to support that population.
Please Note! All of the work posted in my blog is my personal insight into problem solving and answering questions. It is subjective opinions based on scholarly readings. The information may have some errors. I am not a professor.
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