Summary: Bursting Of The Housing Bubble
Bursting of the housing bubble led to the financial crisis started in 2006. To change these negative occurrence governments needed to have a proven monetary solution to mitigate the negative consequences and finally overcome this crisis. To achieve it, this is essential that the central bank and other interaction groups control the monetary base. First of all it is important to make sure that increases or decrease in the money supply which includes checkable deposits, M2—M1 plus time deposits and retail money market deposit accounts, is managed effectively to avert financial panic in the economy (Wright & Quadrini, 2009). Additionally, independent central banks should be given a narrow mandate of stabilizing price because mandates that are
excessively broad create unaccountability and lack of discretion. Furthermore, the kind of assets a central bank has in its balance sheet should be restricted so that its capacity to distribute credits to certain market would be limited. Another solution to overcome the financial crisis is to conduct monetary policy in an organized and efficient manner, regulating the possibility for discretionary activities that might distort boundaries between monetary and fiscal policy.
Obviously, all these solutions are not universal and should not be considered as always applicable because central banks and monetary procedures cannot resolve unsustainable fiscal policies. However, what could be a potential and applicable solution to the present financial economic crisis would be fiscal authorities’ capability to provide honest and dependable pledge to lasting fiscal sustainability, of which this option is a difficult task to accomplish.
References
Wright, R. E., & Quadrini, V. (2009). Money and Banking. Nyack, NY: Flat World Knowledge, Inc.
excessively broad create unaccountability and lack of discretion. Furthermore, the kind of assets a central bank has in its balance sheet should be restricted so that its capacity to distribute credits to certain market would be limited. Another solution to overcome the financial crisis is to conduct monetary policy in an organized and efficient manner, regulating the possibility for discretionary activities that might distort boundaries between monetary and fiscal policy.
Obviously, all these solutions are not universal and should not be considered as always applicable because central banks and monetary procedures cannot resolve unsustainable fiscal policies. However, what could be a potential and applicable solution to the present financial economic crisis would be fiscal authorities’ capability to provide honest and dependable pledge to lasting fiscal sustainability, of which this option is a difficult task to accomplish.
References
Wright, R. E., & Quadrini, V. (2009). Money and Banking. Nyack, NY: Flat World Knowledge, Inc.