Quantitative Easing
The Implementation of Quantitative Easing in the Banking Industry Crisis to Facilitate Bailout of Commercial and Investment Banks
Actions Taken by the Federal Reserve to Mitigate the Crisis
The Great Recession adversely affected the country’s households and firms. The onset of this financial turmoil was marked by the nationwide housing downturn that soon turned into a national and global financial crisis that had far-reaching effects on the economy (Baber, 2018). The banking industry was the worst-hit sector because commercial banks heavily invested in securitized assets that lacked collateral.
In responding to the financial crisis, the Federal implemented monetary policies, specifically the open market operations (OMO), discount rate, and reserve requirements. Notably, the Fed employs these tools to stimulate the economy’s demand and supply of money (Murau, 2017). The federal funds’ rates refer to the interest rate used to make overnight loans by the depository institutions from balances in the Federal Reserve Banks. Liquidity pressure characterized late 2007 and early 2008, whereby the Fed decreased the federal funds rate in mitigating the risks of the reduced liquidity on the economy. This rate declined from 5.25% in September 0o 0.25% in December 2008 (Murau, 2017). The Fed lowered the reserve requirements to ensure the banks retained more finances to offer more loans to firms and households. Notably, this decrease does not translate to households and firms since it was provided to commercial banks; nonetheless, these entities experienced a decline in interest rates. The Fed improved the traditional programs by extending the liquidity facilities, including the discount widow that acts as backup liquidity for commercial banks. The Fed also implemented the fiscal policies that comprise the TAP program. This initiative was utilized by financial institutions that spent $900 in recovering the crippling industry. Additionally, the Federal implemented non-traditional lending programs aimed at issuing all loan types to companies. The federal loaned $29 million to JPMorgan in acquiring Bear Stearns.
How the Corrective Action Helped to Restore Stability to the Financial System
The reduction of the interest rates decreased the cost of borrowing incurred by the banks, hence increasing the money supply in the economy. This reduction benefited the commercial banks seeking funding from the federal and households and firms acquiring debt from financial institutions (Baber, 2018). Decreased reserve requirements ensured the banks deposited less finances in the Federal Reserve and had sufficient amounts to loan customers. Secondly, the expansion of the liquidity programs, specifically the liquidity facilities, allowed the Fed to offer more credit facilities to the bank. The implementation of non-traditional lending programs aimed to salvage banks overwhelmed by toxic assets. For instance, bear Stearns did not dissolve like Lehman Brothers but was purchased by JP Morgan instead.
How the Corrective Action Should Prevent Recurrence of a Similar Crisis
The monetary policies aimed to lower the cost of debt to commercial banks, firms, and households. This policy was aimed at increasing the money supply in the economy by triggering inflation. This policy aimed to encourage borrowing and spending to stimulate the economy and mitigate such a crisis in the future. The Federal Reserve reduction aimed to enhance the banks’ liquidity and offer them sufficient finances to effectively perform their services. The fiscal policies sought to restore the financial sector since its collapse would have prolonged the recession. This policy sought to fortify the industry to prevent failure in the future that would result in an economic downturn.
References
Baber, H. (2018). How crisis-proof is Islamic finance? Qualitative Research in Financial Markets.
Murau, S. (2017). Shadow money and the public money supply: The impact of the 2007–2009 financial crisis on the monetary system. Review of International Political Economy, 24(5), 802-838.
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Question 
Federal Reserve and the Great Recession Analysis
Choose 1 of the following topics related to the Great Recession:
Quantitative Easing
- The housing price bubble, collapse, foreclosures, bailout of underwater mortgages
- Subprime mortgages and derivatives, bailout of FNMA, Freddie Mac and AIG
- The banking industry crisis, bailout of commercial and investment banks
Write a 350- to 700-word analysis of 1 of the following corrective actions taken by the Federal Reserve as a result of the crisis:
- Quantitative easing
- Purchase of toxic assets from financial institutions
- Paying interest on reserve balances
Address the following in your analysis:
- Actions taken by the Federal Reserve to mitigate the crisis
- How the corrective action helped to restore stability to the financial system
- How the corrective action should prevent recurrence of a similar crisis
Note: Use of charts and graphs is encouraged with appropriate citations. Any charts or graphs retrieved from the Federal Reserve Bank of St. Louis FRED website may only be included when the data sources used by FRED are US government sources such as the Bureau of Economic Analysis or the Bureau of Labor Statistics.
Cite at least 2 academically credible sources.