The Federal Reserve Response to the Recent Recession
Rahman R. Funn
[ July 23, 2012 ]
Ms. Lynn Bailey
This term paper examines the history of the Federal Reserve System and takes a look at what causes a recession and how the FED responded to the most recent one. A recession can cripple a nation if not handled properly. With this paper, I explain how necessary interest rate cuts, the purchase of bonds and mortgage backed securities, and company bailouts were needed to prevent a second Great Depression. These actions will result in the United States creating low, short term-interest rates (near zero) through ...view middle of the document...
The key purpose of the Federal Reserve System is to see that nothing like that ever happens again.
Their primary responsibility is to conduct the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices. The FED will pump up a slumping economy by lowering interest rates or slow down a booming economy by spiking the interest rates. They also supervise and regulate banking institutes to ensure the safety and soundness of the nation’s banking and financial system and protect the credit rights of consumers. The FED is an independent central bank because its decisions do not have to be ratified by the President of the United States or anyone in the executive branch of government. They are, however, subject to oversight by the U.S. Congress.
The Federal Reserve must work within the framework of the overall objectives of economic and financial policies established by the government.
What Triggered the Recession?
A recession is a decline in total output (real GDP) for two or more consecutive quarters. There have been 14 recessions since 1929. The most severe recession occurred immediately after World War II. This was due to sudden cut backs in defense production that caused a sharp decline in output.
The recession of 2007-2009 (sometimes referred to as the Great Recession) pushed the unemployment rate above 10 percent. This recession was a severe global economic problem that began in December 2007 and took a nose dive in September 2008. The recession has affected the entire world economy, although some countries were hit harder than others. According to the United States National Bureau of Economic Research (the official arbiter of the United States recession) this recession is linked to reckless lending practices by financial institutions and the growing trend of securitization of real estate mortgages. The mortgage backed securities, which had risks that were hard to assess, were marketed around the world. A more broad-based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices. The dangerous financial situation was made worse by a sharp increase in oil and food prices. The emergence of Sub-Prime loan losses in 2007 began the crisis, and exposed other risky loans and overinflated asset prices. With loan losses mounting and the fall of Lehman Brothers Holdings Inc (Investment Bank) on September 15, 2008, a significant panic broke out on the interbank loan market. As share and housing prices declined, many large and well established investment and commercial banks in the United States suffered massive losses and even faced bankruptcy, resulting in a massive public financial assistance. This recession resulted in a sharp drop in international trade, rising unemployment, and slumping commodity prices.