The Federal Reserve
Yesterday and today’s videos discussed at length the powers of the Fed and the extraordinary powers that the Fed used during the banking crisis. To begin, reflect on what the overall mission of the Fed. Next, consider how the Federal Reserve handled the banking crisis. What were the actions that it took? Was it legal? Was it in keeping with the “spirit” of its mission? Why or why not?
With these thoughts in mind, respond to this week’s second Discussion prompt.
First:
Post a one to three paragraph analysis of the powers of the Fed and the powers it used during the banking crisis. Be sure to cite information from the videos to support your response.
Second:
- Read through a sampling of the postings of your colleagues, focusing particularly on those to which you can add relevant or insightful comments that expand the Discussion.
- Respond to two or more of your colleagues' postings in any of the following ways:
- Build on something your colleague said.
- Explain why and how you see things differently.
- Ask a probing or clarifying question.
- Share an insight from having read your colleague's posting.
- Offer and support an opinion.
- Validate an idea with your own experience.
- Expand on your colleague's posting.
- Ask for evidence that supports the posting.
- Return to your initial posting. Continue the dialogue as desired by responding to your colleagues’ thoughts.
Please proceed to the Federal Reserve Discussion.
The Federal Reserve added large amounts of liquidity, capital used to invest, into the financial markets in order to deny or rather push back a complete market collapse. The Fed used this method to bailout banks such as Citigroup who made loans out to ordinary people like you and me who may not have had the best financial standings and could possibly not pay back their mortgages. Due to these mortgages not being paid out, investors in the banks started to withdraw their holdings making it even harder for banks to repay their debt. Most banks share holdings dropped 80% within the first couple of days of the crisis. The Fe was able to keep a float a couple of the nation’s banks but still a few fell under.
ReplyDeletePatrick Kelly-
ReplyDeleteThe Federal Reserve (Fed) was created in 1913 and signed into law by President Woodrow Wilson. According to “The Fed Today,” The Fed’s overall mission is to instill consumer confidence in the nation’s monetary system. The fed accomplishes this goal through its three primary roles: stabilizing monetary policy, providing financial services, and offering banking supervision.
Wall Street is the root cause of the meltdown our nation recently experienced. According to a CNBC documentary, the people on Wall Street created a mortgage called a subprime mortgage, where anyone, even the people who live in a van by the river, could borrow money. No proof of income was necessary. This led to countless foreclosures, which caused the banks to sink into debt. The Fed had to come in and save the day. A rumor spread that Bear Sterns was going out of business due to overuse of credit default swaps, or insurance on money. According to, “Inside the Meltdown,” the Fed was not able to directly aid them due to limitations on funding private banks, so they decided to help them out through J.P. Morgan. Is this legal? Technically, it is legal, for on paper, the Fed was loaning money to J.P. Morgan, even though the money was going to Bear Sterns. However, some may say that cutting corners like this is unethical. The Fed was just keeping with the spirit of its mission. All it wanted to do was instill consumer confidence in the monetary system. Given this point of view, what the Fed did was legal, ethical, necessary, and proper.
The Federal Reserve has many powers when it comes to regulating the monetary supply, banks, and the economy in general. In AP Macroeconomics, I learned thatthe Fed controls the monetary supply, and can increase it or decrease in order to spur economic growth or curb excessive inflationary growth. If an economy needs a boost, the Fed can buy bonds from corporations and issue more currency, therefore increasing the amount of money in circulation. The Federal Reserve also controls the minimum cash reserves that a bank must hold. This affects how much money can be lent to borrowers. Finally, the Federal Reserve also contrls the interest rates at which it loans banks money and also the rate at which banks can loan each other money. Higher rates reduce the availability of credit (used to curb inflationary growth) while lower rates encourage more lending which can stimulate the economy. The Federal Reserve also regulates other bank activity, and sets other lending standards in order to ensure a strong and healthy banking industry.
ReplyDeleteTo curb the recession of 2008, the Federal Reserve reduced the interest rates at which money could be lent, making more credit available (St. Louis Federal Reserve video). The Federal Reserve also provided funds to banks in attempt to save the banking industry. As seen in "Too Big to Fail", the Federal Reserve provided money to JPMorgan to buy the ailing investment bank Bear Stearns. This was an attempt to avoid the destruction of public confidence, avoid a bank failure, and to save the banking industry since all the banks were interconnected. According to the Federal Reserve Bank of St. Louis, the Federal Reserve has begun lending programs that have not been used since the 1930's in order to loan to non-banking organizations to further save the economy from collapse. The Federal Reserve used many different tools to halt the slide of our economy and because of its actions America did not slide into a second "Great Depression".
During the subprime mortgage frenzy in 2006, The Federal Reserve, under Alan Greenspan, did little to prevent the inevitable crisis. The Federal Reserve had little powers they could utilize to prevent the housing bubble from growing dangerously large. Since many of the mortgage and loan companies, such as Quick Loans, were private entities, The Federal Reserve couldn’t do much to regulate what they were doing. Only the S.E.C had that power and even they did not use it due to faculty corruption. The powers of The Federal Reserve entitle them to regulate banks and our monetary policy. They can buy or sell bonds to increase or decrease the interest rates of loans, but these loans came from banks, not companies such as Quick Loans. The Federal Reserve can also print money to increase or decrease the money supply, but even that great power couldn’t do much to stop the imminent avalanche that plagued the banks and markets. Even if the Federal Reserve could have done more, Alan Greenspan was a staunch advocate of free market principles and therefore chose to let the market figure things out on its own.
ReplyDeleteAfter the mortgage and housing market came crashing down, it took the banks and many parts of the American economy down with it. Under the new Federal Reserve President, Ben Bernanke, The Federal Reserve took a much aggressive approach when it dealt with the banks and firms that were participants in the subprime mortgage frenzy. Since most of America’s major banks were failing, The Federal Reserve had to do something fast before those banks caused a spill-over effect, which could affect other parts of the U.S. economy and even the Global market. One of the ways the Federal Reserve bailed out a bank, such as Bear Sterns, was by using another bank as a medium to transfer the bailout money in order for it to be Constitutional. Although quite a sneaky approach, it turned out to work and saved Bear Sterns its existence. One could argue that this particular action of the Federal Reserve was possibly illegal in a sense that they were manipulating the system to get what they wanted. It was certainly an “out-of-line” thing to do since the Federal Reserve’s main priority was to regulate public banks not private Wall-street banks.
According to the video, “The Fed Today”, the main focus of the Fed is to maintain price stability by deciding how much credit and money should be entered into the economy. This is done through printing money and buying and selling securities. Another task of the Fed includes sustaining stable and healthy banks in order to enhance the public’s confidence in the economy as well as the banks. If these powers are clearly stated and understood, why did the banking crisis occur? Why did the Fed not step in sooner and help the banks before many were forced to go out of business?
ReplyDeleteBecause a system of checks and balances exists within the American government, the FED also follows this system. As the PowerPoint from the Federal Reserve Bank St. Louis states, the legislation enacted The Emergency Economic Stabilization Act of 2008 and the legislation included provisions for a Troubled Asset Relief Program (TARP). Congress also enacted a $700 billion economic stimulus plan than completely saved our economy from collapsing.
The video, “House of Cards” also referenced the Fed bailing out a particular bank. Bear Sterns was a large, well known bank that was in danger of going out of business because people began to lose confidence in investing with them. A rumor began circulating that they had run out of money. The Fed decided to bail out Bear Sterns by enlisting JP Morgan to loan Bear Sterns money to come out of debt. The Fed did so by giving JP Morgan the money since they could not directly give Bear Sterns the money. Luckily, the Fed was able to save Bear Sterns but tens of thousands of other banks were not so lucky and were forced out of business.
Chance Jones
ReplyDelete12 April
The Fed has the responsibility to take care of and foster a growing economy. Though its use of open market operations and its ability to control the interest rate it can control the amount of money circulation and the rate at which it circulates through the economy. With its control of interest rates it also has an effect on the ability for individuals and businesses to be able to borrow money from the loanable funds market. Healthy credit like this allows the economy to grow steady and healthfully, however during the housing crisis people took advantage of this credit system borrowing money they could not repay. With so many people borrowing money interest rates sky rocketed and for those with adjustable rate mortgages it made them unable to pay off their mortgages when housing prices stopped increasing. During the recession the Fed decided to lower interest rates allowing for people to be able to continue safely borrowing form banks and allow people to continue paying their mortgages with lower interest rates. According to the website the fed was successful in its attempt to stabilize the banking and credit system allowing for lower interest rates and to foster a continuation of a healthy and growing economy.
Generally, the Federal Reserve provided funds – liquidity- to function the financial market and maintain price stability. The FED would do such by basically supplying money into the market to stimulate the economy- monetary policy.
ReplyDeleteOne thing it did was through Federal Open Market Committee. Basically through this committee, the Fed would practice the purchase and sales of the bond, in the case of such financial crisis, the Fed would buy bonds to flow more money into the market, which would substantially reduce the interest rate restoring consumers’ and investors’ confidence and spending.
Another significant role Fed played was in its lending programs. First, Fed would expand terms of its lending programs, encouraging banks to lend more money. Also, by utilizing a provision in the Federal Reserve Act, the Fed introduced several lending programs to certain nonbank organizations endeavoring to keep the money flowing, further increasing spending, investment, and also employment.
Also when the Bear Stearn failed, the Federal Reserve facilitated the purchase of Bear Stearns by the bank JPMorgan Chase by providing loans backed by certain Bear Stearns assets. Also AIG, American International Group, was in a danger for financial panic; since AIG played a central role as financial instrument, its failure was clearly undesirable in its potential to meltdown the global financial system. Thus to elude such threat, Federal Reserve provided secure loans to AIG.
As steps above may seem complicated, the fundamental idea is the funding of loans and funds which supplied money into the market and maintained economic stability.
It has been shown repeatedly throughout the videos and papers we have read in class that without some government intervention, a much worse recession was supposedly bound to happen. Because of this, the Federal Reserve felt obligated to intervene and did so through an array of different actions. First, the Fed used its power in the Open Market Committee as described in The Fed Today to substantially reduce interest rates. The reasoning behind this action is quite simple. With low interest rates, people are much more likely to take out loans to start spending which also causes businesses to spend and invest themselves. As a result, the financial market begins to come afloat and slowly but surely will get out of the slump that it currently was in. Secondly, because the Fed is the “government’s bank” which we saw in Inside the Meltdown, it had the power to take funds from its own bank and then transfer funds to ailing banks in need. The fed utilized that power but because the recipient for the bank was not covered or under the regulation of the Fed, the Fed had to use a work-around which came off as extremely shady to a lot of civilians. The fed used JP Morgan, a bank covered under Fed regulation to receive money from the Fed, and then to lend out that money to Bear Stearns which was eminently spiraling down to non-existence(Inside the Meltdown). The rationale behind this decision was to keep confidence alive in the financial market. With big banks such as Bear Stearns going bankrupt and out of business, the Fed perceived too severe a shock to the financial system and so stepped in to keep these banks from failing.
ReplyDeleteAs one can see, the Fed did play a significant role when it came to the financial crisis. It’s goal was to make sure the financial system didn’t totally collapse. Whether or not you believe it did a good job is up to your discretion but the intervention definitely is in straight opposition to a laissez-faire approach to the capitalist ideology this country supposedly thrives upon.
Daddy Swag,
DeleteDo you agree or disagree with the Fed's decision?
According to the Federal Reserve video, the Federal Reserve’s primary focus is to achieve price stability through monetary policy, or control of the money supply. The Federal Reserve is the central bank of the United States and has the power to control the discount rate (price of borrowing money from bank to bank) and the federal funds rate (price of borrowing money from the central bank), which in turn increase or decrease the interest rate. The Fed, however, does not have the power to loan money to investment banks, which is why in 2008, it channeled money through the account of JPMorgan, a commercial bank, to help Bear Stearns maintain liquidity and to instill confidence in the company, as was shown in Inside the Meltdown. The Fed took these steps because Bear Stearns was too big to fail. In the end, JPMorgan acquired Bear Stearns at a low price, and Bear Stearns did not go into solvency.
ReplyDeleteSarah,
DeleteIs this legal? Is this ethical? Did it make the problem worse?
The Fed has the powers of monetary policy, financial services, and banking supervision. The power to coin and circulate money is in the hands of the Fed, they choose how much money is to be in the economic system. Any money transaction goes through the Federal Reserve; such as money transfers between banks. The Fed is in control of government bonds, they decide when to buy or sell government bonds as a way of increasing or decreasing the money supply in the open market. During the banking crisis, the Fed decided how to break up the $700 billion specified by TARP to be given to the banks that were “too big to fail”. According to the slideshow, the Fed supplied funds to stabilize financial markets and the Open Market Committee lowered interest rates in order to promote investment. The government also purchased bank stocks as a part of TARP when the prices were depressed and were resold later at higher rates. Basically the Fed did everything they could to prevent a total collapse of the financial market by loaning money and working with the big banks in danger of collapse to prevent any further damage to the financial market.
ReplyDeleteA bill was passed during the era of the New Deal called the Federal Reserve Act which stated that made it illegal to give money to organizations that were not identified to be government owned organizations, unless under an “unusual” event. Therefore, I believe that it was necessary for the Federal Reserve to create an under table transaction between a government own bank to stop the bankruptcy of an investment bank. I think this was necessary because people have invested a lot of their money into such investment banks that in response to its failure, a percentage of U.S. citizens will be unable to fend for themselves after the crash. By doing so, people are still able to feed themselves while recover. The primary initiative to increase the money supply in America is to reduce the interest rates and initial loans. By doing so, more people will invest and consume and in such, stimulate the stagnant economy. Due to the banks greed and eagerness to take advantage of the housing boom, the downturn of the housing bubble was not surprising. I do not believe that the federal reserve was at cause to such disasters, but the incentives and manipulation of brokers and investors.
ReplyDeleteThe primary role of the federal reserve is to stabilize the monetary policy to keep the money flowing in the economy. By stabilizing the currency, people have confidence in the value of the dollar and they keep spending.
ReplyDeleteDuring the banking crisis, creditors were failing. All the creditors who were backing the housing market started to fail. One of which was a major company called Bear Stearns. According to the video Inside the Meltdown, the Federal Reserve knew it couldn't directly give Bear Stearns the money, so the Fed loaned money to JP Morgans. JP Morgans then loaned that money to Bear Stearns. This move was illegal. The only role the Fed should play in the economy is keeping in charge of the U.S. monetary policy. It went beyond and overused its power. What it did was helpful for the economy, but it did not have the right to save a company. It broke the idea of lassiez-faire.
This comment has been removed by the author.
ReplyDeleteThe fed’s job is to conduct the nation's monetary policy by influencing the monetary and credit conditions in the economy, supervise and regulating banking institutions to ensure the safety and soundness of the nation's banking, and maintaining the stability of the financial system and containing systemic risk that may arise in financial markets. They loaned out the money illegally to Bear Stearns, they should have just let them fail, but they did keep with the “spirit” of what the fed should do by trying to keep the banking system stable. As was said in the house of cards video, there was almost nothing the Fed could do, and I still believe that there was nothing they should have done.
ReplyDeleteMichael,
DeleteIf the Fed kept with the "spirit" of its mission, does that make it right? Does it matter that the Fed Chairman THINKS he is doing what is right for the U.S. economy?
Raven Norman April 12, 2012
ReplyDeleteThe Federal Reserve obtains the powers of restoring money to banks as well as three primary roles; monetary policy, financial services, and banking supervision. The overall mission of the Fed is to maintain balance in the United States banking and economy (The Fed Today), therefore restoring public confidence in the economy so that the banks are safe and sound.
Next, during the banking crisis of 2008, the Federal Reserve also referred to as the “banker’s bank” handled the national crisis provided bonds to the banks to bail them out as well as reconstructed the Federal Open Market Committee and reduced interest rates.
Although what the Fed did was legal there had to be extreme circumstances to get them involved, such as the downfall of Bear Stearns. Through JP Morgan, the Federal Reserve indirectly made loans to bail the company out. However, it did I fact keep the spirit of it mission because it continued to transport funds in forms of checks and currency and is still known as the centralized clearing house.
The mission of the Federal Reserve is to influencing and maintaining the monetary and financial systems of the economy which lead to the best rates of employment, stable prices and moderate interest rates for consumers. The supervision and regulation of banks is included in this mission because without safe banks their mission is inconvincible meaning they must protect banks at all cost. If the Federal Reserve fails to protect banks, which consumer depend on, it is failing to protect the consumer if it fails to protect the consumer, the building blocking in the system, it has failed to maintain the economy. This is what the banking crisis showed the Federal Reserve let banks fail due to the result of the housing crisis and the only actions they took to fix it was to bailout the banks. This was legal and kept with the spirit of their mission but it was not legally sound. It only halted the crash rather than fix it was only putting tape on a fringe in the wire of the economy. Rather than punishing the rich and greedy they let them escape by supplying them with a safety net in which to fall back on only increasing the debt of the economy, who used the people who bought the subprime mortgages as a scapegoat to their mistake to tamper and experiment with the economy to increase their benefit. In the spirit of their mission the Fed did their job but in the processes condemned the non-American one percent of the American people to face the consequences of the one percent’s mistakes.
ReplyDeleteThe Federal Reserve’s goal is to maintain price stability through monetary policy. The FED was supposed to control the money supply during the recession. Its job was to regulate the banks and they didn’t do their job correctly. They stayed out of investment banks’ business, because they were making so much money. This proved to be a huge mistake. The biggest “crime” that the FED committed was lending money to JP Morgan to give to Bear Sterns. In my opinion this was illegal and the issue led to Americans losing trust in the FED and our money. It seemed there were a lot shady transactions taking place during the crisis because the government decided companies were “too big to fail”. Alan Greenspan points out in “house of cards”, that there was not much that the fed could have done to prevent the crisis because; most of the subprime loans were made by private entities. Greenspan was also a free market advocate and believed any problem in the market would correct itself. Nobody seems to have taken the blame for the crisis but one this is certain: the FED failed at doing its job of maintaining our confidence in our money.
ReplyDelete@ Michael Campion.
ReplyDeleteI agree with you Michael, I too also believe that the Fed. should have just let Bear Sterns fail. Fail horribly. But there's nothing we can do, the past is the past eh? Well, with that being said, what shape do you think our economy would be in right now if the Federal Reserve had not bailed out major investment firms such as Bear Sterns? Would it be in good shape or even worse shape? Personally, I think that we would have a worse recession because the banks failing would affect other parts of the economy. Since there would be less investment, the amount of jobs would decrease, more and more businesses would shut down. Even though we did experience this, it was to a much smaller scale to what it would have been without the bail-out. However, I think even though it would have been a worse recession without the bail-out, I think that in the long run, we would have come out much stronger than we did with the bail-outs. I believe that the "ying and yang" forces would have worked on the market and it would have shifted just as hard in the opposite direction. I don't know, what do you think?
Wang Tram,
DeleteIt is an interesting dilemma. You make an interesting point about Wall Street fainling. If they failed, no one would have loaned any money to anyone. Without daily financial capital, the biggest businesses in the world would not function.
The main goal of the Federal Reserve is to maintain price stability. When the Federal Open Market Committee meet up they have to decide the amount of money and credit available for the economy and the money is then given to the banks that are under it. Whatever the Federal Reserve has to do they will do to preserve the health of the economy. By setting up the rules for the day to day activity of distribution of money it is a way to make sure the Reserve is keeping the financial system in check. However since all banks are not under federal regulation, certain things can slip through the cracks as seen during the banking crisis in 2008.
ReplyDeleteWhen the crash of 2008 hit the economy the Federal Reserve took an unusual approach, and when I say that they acted above their implied powers by giving a loan to J.P. Morgan with the complete intention of lending it to Bear Stearns. Bear Stearns is an investment bank and not subject to regulation by the Reserve, so when they received money from J.P. Morgan that was the Federal Reserve getting involved where they never have before. Al though they overstepped their powers they viewed it as proper and necessary to avoid an even bigger financial bust. It is technically illegal what they did, but they did what they had to do to preserve the health of the economy and keeping it from falling completely under. So, the acted beyond their means, but it was necessary.
Arista,
DeleteWas it illegal or unethical? Technically, they were legal in giving JP Morgan money.
@Harry - You make a valid point in saying that the Fed failed because it obviously did, but I have to disagree with you in that I think that its biggest failure was waiting so long to intervene. Yes, most Americans believe in a lasseiz faire ideal, but had the Fed practiced some restraint in their monetary policy, we could have avoided the inflation of the housing market. Our economy was actually running fine as it was, but because the Fed wanted to further stimulate the economy, they lowered interest rates to a ridiculous degree, which paved the way for subprime mortgages. They should have had the foresight to know that lowering interest rates would lead to excessive lending/borrowing.
ReplyDeleteSarah,
DeleteYou make an interesting point. The former Fed Chairman, Alan Greenspan, "says" that he believes in laissez-faire. However, it was his Fed that manipulated interest rates that allowed mortgage loan rates to be at their lowest, ever.
Isn't that more keynesian economics than laissez-faire economics?
@ Enya Lowe.
ReplyDeleteI agree with you Enya. Although what the Federal Reserve did was legal, it was definetly not "legally sound". We live in an economy that depends on the theory of Laissez fair, and the fact that the Federal Reserve went against that ruined that whole mission statement. Our economy and government contradict each other. We claim to be capitalists and have a relatively free-market ONLY when the economy is good. All of a sudden when the economy turns sour, We turn into a government-controlled economy. I believe this is wrong also. The rich who got away with this will never learn the hardway. Instead, they will get bailed out and continue their work. I think that the Federal Reserve should have sucked it up and let the economy go wild. Even though it would have been hard, it was a sacrifice. But no one took up the excalibur and killed the orcs. Not one sole. Instead of letting the nature of free marketing do its work, we built a wall. We didn't solve the problem, WEBUILTAWALL. A WALL.
Although we could blame the fed for lending out too much money or vice versa during the banking and market crisis, it seems that the Fed was just doing what it was made to do: stabilize monetary policy, provide financial services, and offer banking supervision. People wonder if the mortgage crisis could have possibly been prevented.. The fed thought that as long as inflation remained low and employment was high that the market would stabilize itself. The fed loaned out $75 billion to try and restore liquidity in the market but that didn't do much with the overload of subprime mortages and loans that had to be paid. The Fed also lowered interest rates for 5.75% to 2%. This was to allow money to flow easier but in the end did not do much. I think at the point of the crisis there was not mcuh the Fed could do. Enya I'm not sure if I agree with you in the fact that the federal reserve is designed to "protect" banks. I think it is designed to supervise banks, but definitely not to protect banks who are obviously doing the wrong thing. If the federal reserve were to keep bailing out banks that were giving faulty loans that would be doing nothing for our economy. We should be teaching banks to survive on their own without a lot of outside help and protection from government organizations.
ReplyDeleteThe Federal Reserve’s role in society is to stabilize the economy’s prices on goods and services. An alternative perspective to the FEDs purpose is to prevent inflation and/or recession. The Federal Reserve’s primary roles include monetary policy, financial services, and Banking supervision. The FED is able to undertake monetary policies which raises or even depreciates the value of the american dollar. These so called Monetary Policies consists of actions that influence the supply of money in the market, actions such as Open Market Operations (the transactions of government securities). The Fed can buy and sell governement bonds in order to stimulate the economy in whatever situation. For example during the Banking crisis, the Fed bought government securities and put the money into the banks in order stabilize the crashing banking industry.
ReplyDelete@WangTram Industires
ReplyDeleteDavid, you say that the Fed was successful in saving Bear Sterns from going out of business, but didn’t Bear Stearns get bought out by JPMorgan, the same bank that was used as the medium to transfer a loan from the government? Yea, it causes one to think whether or not the Fed truly helped the economy from collapsing or whether or not it made it “look” like it didn’t’ collapse when in actuality , the same financial depressions may have indeed occurred with or without government or Fed intervention.
@JinPyon I said the same thing. The were acting illegally but it was for the greater good. So can you really argue about that? I see it as taking initiative more than anything because if the Reserve didn't do it someone else would have to.
ReplyDelete@Michael wesselmann
ReplyDeleteMichael, you say the Fed did everything it could possible do to salvage as much of the economy as possible during the financial market collapse, but do you believe that without the Fed intervening to help, we would have been better off? Would we have been better off by approaching the problem in a laissez-fair mindset?
The Federal Reserve controls the money supply of the whole government. The main mission of the fed is to instill confidence in the monetary system. The three primary roles of the Federal Reserve banks are monetary policy, financial services and banking supervision as said in The Fed Today video. The fed attempts to make the banks both safe and sound so that it can help the public more confidence in the banks. The monetary policy focuses on price disability which is the fed’s primary goal.
ReplyDelete@WangTram Industries
ReplyDeleteI believe it's fine to believe in the fact of laissez faire, but you have to realize what you're saying. If the government were to allow the upper class to "learn their lesson", the lower and middle class would have even worse repurcussions than that of the upper class who can just buy their way back into the economy. The theory of laissez faire is just a tool at that, to keep the economy running. It should not be viewed as a key principle that the U.S. should abide by.
@WangTram Industires
ReplyDeleteYou say that because the Fed lowered interest rates that this disaster occured but it wasn;t low interest rates that were the mian culprit in this disaster, you forget that the people who gave out the loans were giving out SUBPRIME MORTGAGES which means they chose not to give out loans to people who were qualified enough to pay back the loans. So yes, there were lower itnerest rates, and with these lower itnerest rates more people who formerly weren't able to take out and get loan were granted the ability to do so, but there's a fine line between providing loans for people who can and cannot pay them back. The Fed could have done nothing in that respect, it's the moral fabric of our country that was weak in stopping the collapse.
The Federal Reserve is the central bank of the United States which came to a trouble because of excessive amount of money to escape from the banking crisis. As I remember in the video, Federal Reserve provided financial services for banks and the U.S. government. Yet, due to the banking crisis, many of the loans were brought by the nation's largest banks. They failed to manage the price stability with monetary policy because many homeless people were borrowing from the bank without discipline. Fed decided to help Bear Sterns with J.P. Morgan. I do believe that it ethical because the money was purely meant to help.
ReplyDelete@ Enya Lowe
ReplyDeleteFrom my understanding the Federal REserve had no regulation over Bear Stearns.The Reserve does not meddle in investment banks which were the ones who linked themselves to banks the Reserve did control. The Reserve could technically do nothing about the bad investments these banks were making. They just let it happen I guess not realizing what was going on. If you say it was their job to protect the banks I don't know what they could really do to protect them because they have a very laissez-faire approach to monetary institutions under their regulation.
@Harry Do you think it's possible that the bank bailouts prolonged the recession? Would the recession turned around quicker had we just let the unhealthy banks fail and allowed new, healthy companies to emerge. Instead, we kept crippled companies alive against free market principles and put their bad practices on the taxpayer's back. Instead of breaking the ground for a long-term solution, we just saved the financial system for a day.
ReplyDelete@Arista Moultrie
ReplyDeleteHow is acting illegally for the greater good when economy and people suffered instead of solving the problem they created an even big mess that they won't even have to deal with. The Reserve only created a problem for other people to solve not solved the problem they set it up so they could look like the good guys when in reality they just made more of a mess than before.
According to “the Fed Today,” The Fed consists of two main bodies: the Board of Governors and the 12 Regional Banks. The three primary goals of the 12 Regional Banks is to control monetary policy, financial services, and supervise banking. In monetary policy, the Fed is responsible in maintaining price stability. The Fed’s Open Market Committee is responsible for controlling how much money and credit is in circulation in the economy by buying and selling bonds and securities. The Fed does bank supervision and attempts to make banks safe and stable in order to maintain public confidence in the economy. In bank supervision, the Fed is responsible in examining a bank’s financial records and supervise that the bank follows regulation. The Fed also provides financial services, like being the clearing house for the government. Large and small transfers go through the Fed. The Fed is also considered the “the bankers’ bank” because banks go to the Fed to receive money. The Fed is also considered the government’s bank because it controls its money.
ReplyDeleteAccording to “Inside the Meltdown,” the Fed gave money to JP Morgan which in turn gave money to Bear. The Fed is not allowed to give money to investment banks, so the Fed gave money to the regular bank JP Morgan. Banks are allowed to give money within each other, so Morgan gave money to Bear. The Fed loaned money to banks and lowered the interest rates so people would increase investment.
@Jinhak Chung
ReplyDeleteDo you think the Fed should have saved Bear Stearns? Should the Fed have bought the securities? What will it do with all those securities if the banks don't want to buy them anymore?
@ Scott
ReplyDeleteYou said that the Fed bailed out a couple of banks. but that's about all you said. You never stated whether it was legal or not, which I think it is. It may not have been ethical, but it was totally legal and I believe that it was "necessary and proper." The Fed did what they had to do to try and save the economy. Also, there were many banks that failed that the Fed was not able to keep afloat. So, I'm saying that you are mostly correct in what you are saying, but I think the Fed is justified for what they did.
@ Jin Pyon
ReplyDeleteyes I agree that the FED's lending of the money, indeed, broke the idea of the lassiez-fair; however, ideas are not laws, therfore nothing was violated. While I do agree that FED overused their power, it was certainly "necessary and proper" for the fiancial emergency.
@Aristamoultrie America wasn't a country founded upon allowing Machiavellian "The ends justify the means" justice in order to "Promote the greater good". America was a country designed with a rule of law in mind, and strict limitations on power in order to avoid injustice, oppression, and tyranny being done in the name of the "greater good". While I support promoting the greater good, it needs to be done with a sound legal basis in order to protect the limitations of power that this country was founded upon.
ReplyDeleteQuinn,
DeleteWhat is your feeling on Lebanon? Nicaragua? The Savings & Loan Crisis? The emergency loans to Mexico in the 1990s? The airline crisis, afer 9/11? Iraq?
@Quinn_R Yes, that'e exactly what i beleived happen. We prolonged the recession by allwoign crippled banks to be crippled for a longer amount of time. Had we let banks that were goign to fail fail, we would then weed out banks who took part in wrong business practices providing and opening the doorways for other entrepenuers to step in and take over the vacancies caused by wrongful business tactics. And i also beleive the turn around oout of the recession would have happened much more quicker
ReplyDelete@Arista Moultrie
ReplyDeleteI see you're point there is nothing that they could do so they should've never helped in the beginning. They should've let the bank crash rather than protect them. Bad investments are bad investment it should've been the banks problem and not the reserve. They knew what was going on once their numbers started to be thrown in disarray but again what can you do? What they did created more problems in the end, let the banks fix their own problems if their is no regulation.
@Harry - I'm not denying that there was a lot of greed and a lack of morals in the period leading to the crash. But I do think that if we blame the Fed for anything, it would be for waiting for so long before saying something to these banks. Also a failure on the part of the SEC.
ReplyDelete@Jin Pyon, who replied to Jinhak Chung
ReplyDeleteYes, I believe that the Fed should have bailed out Bear sterns. I know that the Fed is only technically allowed to help out federal banks and not private banks, but it was only trying to save America's economy. The Fed technically did not break any laws directly. Also, the banks don;t buy securities form the Fed. It's the Fed that buys and sells securities to the banks.
@WangTram Industries who commented @SwaggDaddy
ReplyDeleteI agree with WangTram. I think the main aspect to the meltdown was the subprime mortgages. Lenders should have not loaned out money to people who won't be able to pay it back. I mean come on. Someone should have noticed that something was wrong. Agents who were lending out subprime mortgages were once pizza delivery guys. Did no one see anything wrong with this picture?
@ Quinn
ReplyDeleteI think that we kep the cripples companies alive and place even greater hardship on the tax payers. What I think should have been done during the banking crisis was let the weaker banks fail. It's the concept of social darwinism. If we keep bailing out the weak, then soon enough we would just have a bunch of weak banks. We should have let the financial system fail, so that the economy could have a frsh start.
@ Hee Kang
ReplyDeleteYou stated, "As I remember in the video, Federal Reserve provided financial services for banks and the U.S. government." What video? You were asleep the whole time. Also, can you specify the "financial services" you speak of?
Also, your grammar is wrong when you said "I do believe that it ethical because the money was purely meant to help."
Im sorry but I think your post is a bit too general for someone who had seen the video. Please support your claim with details if possible.
@Shelby
ReplyDeleteI'm not sure if I completely agree with your statement, "We should be teaching banks to survive on their own without a lot of outside help and protection from government organizations." The Fed is major part of our government and without it, spending and creating money could be decided without the consent of other fundamental parts of the government. Some sort of regulation of banks should occur but too much could be a bad thing, as with anything else.
Other than that, I agree with everything else that you wrote about the Fed and its powers.
@James Kim
ReplyDeleteYou wrote a lot, so you know what you are talking about. I agree with what you are trying to say. The main point is that the Fed didn't have the right to complete its action, but it did anyway. It saved the economy, and everybody is happy.
@ Jin Pyon's reply to James Kim
ReplyDeleteSO what is the point of your reply?
@Jin Pyon
ReplyDeleteI would like to say that considering the economy we are in now, that the decisions made back than were bad ones... but I am forced to say that the decisions made back in the Banking Crisis were the correct ones. There was too much at stake during the time to allow many of the big banks to fall. The answer found admist the falls was a painful one at that, but it did bring the economy to a recovering state to say the least.
@patrickKelly
ReplyDeleteI agree with you that it was legal for the fed to bail out the bakns whether we like it or not. It was necessary in order to keep our economy alive. The only thing I have to add is that in the future these banks with previous bailouts should not get second chances when other banks are functioning properly and succeeding. (if that situation were to occur)
@Jin Pyon
ReplyDeletei agree with what you said about how the Fed broke its jurisdiction by helping the banks bail out, but you have to realize, if it didnt help, our economy wouldve been even more damaged
@ Arista Moultriwe
ReplyDeleteI think the people that caused the banking crisis were the banks. It was the banks' problem for doing unethical and dishonest investments and issuing subprime morgages to reap the $$$. Was it the Fed's responsibility to fix the banks' messes however? The Fed should have initally supervised the banks and ensure that they follow all regulation. Who do you think caused the banking crisis and do you believe the Fed had a duty to bail the banks in order to save the financial sector?
The Federal Reserve, in my opinion, is a tool used by the government to further control the American Economy. The Fed is able to decide the money supply, the interest rates on loans made between banks, the minimum amount of cash a bank holds, and they can also buy or sell bonds. With the crash in 2008, the Fed assumed even more responsibilities by giving banks money to lend out. True, this event led to a halt in the craziness surrounding the crash of 2008, but it also just continued to make the Fed more powerful.
ReplyDelete@SwagDaddy's question to Michael W.
ReplyDeleteEven though this question is directed towards Michael, I believe that if we had approached the banking crisis in a laissez-faire mindset, we would have been worse off, but only because at that point it is too late to change mindsets. The Fed was right by stepping in, even though that goes against a free market economy and everything I believe in. Had we actually maintained a laissez-faire mindset for a long time before the crisis, then things could have played out differently. Would these banks give out these subprime loans knowing that they were on their own? I'm sure that these banks knew going in that if they were to fall to the depths, good ol' Uncle Sam would be there to help them out, which in fact did happen.