In December 23, 1913, President Woodrow Wilson signed the Federal Reserve Act into a law. Congress created the Federal Reserve System over a hundred years ago to appear as the U.S. central bank. The Federal Reserve was established to help have a more reliable and balanced banking system for the private banks. They also provide financial services for the U.S. government, U.S. financial and foreign official institutions, and the nations payment system. The Federal Reserve helps keep the economy going by interest rates.
After the new bank was created, they had to create a committee to establish the layout of the new law. This committee was called the Reserve Bank Operating Committee; the committee consisted of a Treasury Secretary, Secretary of Agriculture, and Comptroller of the Currency. With the Federal Reserve Law now in place, on November 16, 1914, the Reserve committee chose 12 cities to make the Federal Banks their homes. These banks are located in New York, Philadelphia, Boston, Cleveland, Richmond, Atlanta, St. Louis, Chicago, Minneapolis, Dallas, Kansas City, and San Francisco. As of today, these cities are still the 12 sites of the regional banks.
One historical event that was the longest recession that has occurred since World War II was the Great Recession. The Great Recession started in December 2007 and ended in June 2009. When the Great Recession began in 2007 the GDP felly by 4.3% and the employment rate reached up to 10% by the end of 2009. In the early 2000s, there was a housing boom taking place in the United States. Financial companies were selling mortgage- backed securities at an unseen amount. In 2007, when the real estate market fell apart, these mortgage securities lost value, hurting the banks and financial companies that were selling them, not only in the United States but also in Europe. During this crash, the Americans lost over 7.5 million jobs causing their households to lose about $16 trillion of net worth because of the stock market fallout.
Many people say that real estate market crash wouldn’t have happened if the Bush administration and the Federal Reserve noticed the early warnings signs. During this time they kept making a strong money supply and having low- interest rates in hopes that would keep the problems away from the real estate market. Mentioned earlier when the banks and financial institutions sold these mortgage- backed securities, they were offering them to subprime borrowers. Subprime borrowers are people who are a high risk to the bank or financial institution they got the mortgage from because they are most likely to default on the loan. They gave these subprime borrowers such a low interest rate they were going like crazy. The borrowers didn’t know that these loans would rese to a much higher rate, when these loans had reset, the value of the homes in the real estate market fell. That was when the real estate market crashed. They say that these banks and financial institutions trusted these loans too much.
April 17, 2007, was the day the Federal Reserve really had to step in. The monetary policy workers were helping the lenders create loan arrangement for the customers, so they didn’t have to foreclose. That was the Federal Reserve had to drop interest rates, they fell to 4.25%, but it was too late to help the markets. In 2008, the Federal Reserve broadened their lending for the financial institutions and banks to help them with critical funding for their day-to-day operations. The Federal Reserve helped improve the markets in 2009.
The outcome of the Federal Reserve and the monetary policy in the Great Recession is that in the early 2000s they had such a low interest rate and there was bound to be a time that it was going to go belly-up. When the Federal Reserve raised their interest rates and the prices of the houses fell, and the Federal Reserve tried to drop their interest rates to not create such a large economic downturn. That was when the markets were too far-gone.
Another thing that the Federal Reserve wasn’t paying attention to, was that the nominal GDP was falling in 2008. The Federal Reserve can control the nominal GDP through the monetary policy. In order to keep the NGDP from falling even more the Federal Reserve didn’t increase the money supply and still had high interest rates, causing the NGDP to plummet. Many economists believe that the Federal Reserve was paying too much attention to the housing market crash rather than the NGDP. They say when the recession has hit your NGDP will fall before inflation. The Great Recession ended when President Barrack Obama and Congress passed the American Recovery and Reinvestment Act in February 17, 2009. This was a $787 billion plan to help put an end to the Great Recession.
At the end of the Great Recession, the Federal Reserve purchased over $1.75 trillion of long- term assets. They did this to support the housing market and help improve the financial conditions throughout the United States. In 2013, the GDP was a little bit over 4.5% and the unemployment rate was at 7.3%. The federal funds rate was at zero and the market was surely but slowly coming back up. The Federal Reserve has learned from their large mistakes and is evolving with their monetary policy.
As of today the monetary policy has gone back to normal size and has very stimulative monetary policy as we speak. The unemployment rate has reached their goal and is very consistent. Inflation has remained below the Federal Reserve at 2% since 2013. The Federal Reserve is still trying to determine when it is the best time to raise interest rates, but they realize if they raise them too fast they can cause inflation or maybe another recession.
When the government uses the term “too big to fail,” this means that the company is so important to the economy that the Federal Reserve has to provide assistance, so that this large company does not fail. I think this is a good concept because the Federal Reserve should help a bank that is in financial need because this bank is so large and if it were to end, many clients would be left in the dark. This will also help them from having an even larger effect on the economy. Yes, it might be costly for the Federal Reserve, but it is the best thing they can do to keep from a disastrous event. An example of “too big to fail,” would be when Lehman Brothers had to declare bankruptcy, being the largest bankruptcy filing in the United States. In a few short days, the Federal Reserved loaned insurance and investment company AIG $85 billion, so they could keep on operating.
Bibliography:
Amadeo, K. (n.d.). The Great Recession of 2008: What Happened, and When? Retrieved from https://www.thebalance.com/the-great-recession-of-2008-explanation-with-dates-4056832
Federal Reserve Bank. (2012, November 07). What is The Fed: History. Retrieved from https://www.frbsf.org/education/teacher-resources/what-is-the-fed/history/
Federal Reserve Banks. (n.d.). Retrieved from https://www.richmondfed.org/faqs/frb
History.com Staff. (2017). Great Recession. Retrieved from https://www.history.com/topics/recession
Rich, R. (n.d.). The Great Recession. Retrieved from https://www.federalreservehistory.org/essays/great_recession_of_200709