Compare And Contrast The Monetary Policy And The Federal Reserve System

Monetary Policy and the Federal Reserve System Monetary policy is the Federal Reserves’ way of influencing the amount of currency and credit that is in circulation in the United States economy. When the currency and credit rates are altered, the interest rates and performance of the U.S. economy are affected. There are three goals of monetary policy; promote maximum employment, stable prices, and moderate long-term interest rates. The Federal Reserves’ goal is to implement effective monetary policies to achieve these three goals. Since the financial crisis in 2008 that was caused by the housing market crash of 2007, many monetary and fiscal policies have been implemented in an attempt to correct and improve the economy. During a recession
such as the one that occurred in 2008, the Federal Reserve System has several methods in which to fight a recession. The Federal Reserve system will lower interest rates by changing the discount rate and increasing the money supply in an attempt to expand aggregated demand, selling Treasury bills or notes (removes currency form the market) and buying Treasury bills and notes (puts currency into the market), altering the reserve requirement that banks are required to maintain, and or extend cash and or forms of credit to a variety of financial institutions. The Housing Market Crash that occurred in 2007 is considered the worst housing market crash in the history of the United States.
The stock market crash in 2000 lead people and investors to lose their confidence in the market, which then prompted them to put their money into the housing market. The federal reserve and banks thought that the housing market was creating wealth. People were buying and flipping houses left and right. They noticed the prices of houses increasing, it became easier to get a loan from banks because of the lower standards for loans. When people applied for their loans at the banks, the banks would approve them, securitize the loan, and then pass the risk of the loan off to some other bank or agency. As the bank approved more and more loans, their reserve holdings grew smaller and
smaller. The peak of the housing market occurred in 2006. That year people began to default on their loans. In 2007, the credit markets froze, subprime credit stopped, and interest rates for corporate loans and consumer loans rose through the roof. In February 2007 Freddie Mac made the announcement that they would no longer be buying risky subprime. In April New Century Financial Corporation filed for bankruptcy. Then in June Bear Stearns announced a loan of 3.2 billion dollars in an attempt to help bailout one of its funds that invested in CDOs. Then on July 31st, Bear Stearns liquidated two of its mortgage-backed security hedge funds. The stock market hit a new high over 14,000. August 2007 was the start of the housing market crash, American Home Mortgage filed for bankruptcy, and no subprime loans were available. Beginning in January of 2008, Bank of America bought Countrywide Financial for 4.1 billion dollars.
At that time, they had a total of 1.5 trillion dollars’ worth of loans. On March 16th Bear Stearns merges with J.P. Morgan, selling itself for $2 a share, only a fraction of their current trading price. Then on September 6th, the treasury announced the takeover of Freddie Mac and Fannie Mae, along with their five trillion dollars in mortgages. Later in September Bank of America acquired Merrill Lynch, Lehman Brothers filed for bankruptcy, and Down dropped 400 points. The federal reserve lends out $85 billion to the American International Group. On September 18th, The Chairman of the federal reserve and the Treasury Secretary met with Congress to propose a $700 billion bailout. On the 26th, Federal regulators seized Washington Mutual, and have a deal to see the majority of J.P. Morgan for $1.9 billion, representing the largest bank failure in the history of the United States. On September 29th, Congress chooses to not pass the $700 billion bailout. Citigroup acquired Wachovia. On October 1st, the Senate passed the $700 billion bailout bill. On the 3rd of October the House of Representatives passed the bailout plan and George W. Bush signs it into a
law. With all of these events taking place the Federal Reserve needed a way to stop the recession and to turn the economy in a positive direction again. In order to do this the Federal Reserve implemented the Single-Tranche Open Market Operations Program on March 7th, 2008. This program was conducted by the Federal Reserve Bank of New York or the FRBNY. The goal of this particular program was to provide term funding to primary dealers, address the liquidity pressures of the financial markets, and to support the flow of credit to households and businesses within the United States.