What Is the Federal Reserve’s Response for the Great Recession ?

What Is the Federal Reserve’s Response for the Great Recession, and how did it Work?

The great recession seriously affected the United States economy in 2007. The economic activities of the late 2000 weighed in on the United States economy to an unpredictable and unexpected turn. The economy took its lowest turn recorded in history. The recession was, as seen by analysts, the greatest event in recent history after the great depression. This economic free fall would last from the late 2007 to the year 2009.

Several economic measures were employed to mitigate the sudden downturn, which proved hard to control. Excessive mortgage and the housing market that was experienced in the United States caused one major cause of the great recession. The American lending institutions were also to blame for greatly relying on foreign customers’ foe their profits. There was excessive lending to foreigners therefore affecting the United States economy. The total sum of all these led to fall in value attached to mortgages backed securities (Arestis, Philip, and Karakitsos 173).

The great recession was not wholly a surprise to the United States market. The world economy was already experiencing massive credit fall problems. Several United States companies went bankrupt including the most stable companies. Massive unemployment was experienced all over the world. The stock market on the other hand took a nosedive causing losses to millions who had invested in the stock market.

Federal Reserve Response

The American Federal Reserve in collaboration with other major central banks formulated policies that were meant to save the economy from the great recession.  The policies may not have been popular with several experts but ultimately ended the economic free fall. The central banks also had different opinions on how to manage the crisis but there was need to find a common ground in the approaches. In a quick response, the central banks in Europe and the Federal Reserve to be specific extended their lending terms. This measure involved making liquidity accessible night through for 28 days wit5h a window open for extension for more than three months. This was meant to allow different operation maturities to allow banks more control on rates and balance of payments.

The Federal Reserve and the central banks also made sure that there is no shortage of liquidity. On noticing the trend the market was taking in 2007, central banks pumped more

The Federal Reserve also being an independent authority, decided to acquire several financial assets to cushion the economy. The Federal Reserve also made a decision to bail out several United States companies from collapse. The bailout was meant to secure shareholders from effects of the financial crunch. Other intervention measures by the central bank included making emergency loans to other financial institutions, dealing in treasury bills mortgage and other mortgage securities. The Federal Reserve also sold Bear Stearns though there has been much debate on whether these Bear Stearns took more risks knowingly assuming the risk to losses was more on the owners. Whereas the debate could have been valid, there was need for quick response to forestall the crisis (Eichengreen 193).

The banking institution on its own did have enough shock absorbers to the trend the market was taking. The losses that they incurred were astronomical but kept fighting on to prevent further losses with various financial interventions. However, individual financial institutions like the bear Stearns did not have that ability and therefore the only available option was takeover by individual institutions. The trend was replicated in Europe and the United Kingdom in particular. The only disadvantage is that individual terms were not very pleasant.

The regulators and supervisors also have a major role to play. Originators and brokers needed to be regulated. The mortgage issuance was one major cause of the great recession. It therefore follows that mortgage originators need some form of regulation. The qualities of borrowers need to be assed. The originators had to be sincere and true to their clients. The originators should always act in the best interest of the person borrowing. Agents of the institutions engage in transactions with the mortgages precipitated the great recession without verifying the financial probity of those that are borrowing. The policies governing such transactions lacked and therefore it was a time bomb waiting to explode (Davidson 163).

The Federal Reserve therefore in mitigation made rules that ensured that income of borrowers was probed before any mortgage was sold to them. This interventionist measure ensured that borrowers do not rely on the value of the property appreciating to service the mortgage. Other rules also included prevention of repayment of the loan faster than was in the loan terms. There was a rule also to encourage establishment of escrow accounts. The need for new rules was expected to help bring sanity to the mortgages, which were experiencing a boom.

The rating agencies also significantly affect the financial market when they do their rating. These agencies assess the risks on the market entities they chose to rate. There has been great incompetence or lack of technical knowhow of how to rate financial institutions. These agencies that engage in rating such financial institutions may not be sincere because of the potential conflict of interest.  These institutions receive a reward for such study and therefore may be compromised to give a false rating. The only solution lies in regulating these agencies so that they have a structured way of giving a true reflection of a structured company. The rating houses also need to update their way of doing rating based on the new and changing financial society (Mizen 531-532).

Banks were also supposed to carry out their own regulation and tests to be able to gauge and foresee stress areas. The complexity in the new financial situations needs early warnings to be able to forestall and fervent cases like money laundering among other banking malpractices.

The Federal Reserve in another bold measure decided to keep the funds rate at zero. This trend was to go on from 2011 for two years. This action was intended at ensuring the future is cushioned from the any expected rise in interest rate. This measure also played in the minds of commentators and this helped stop speculation on the interest rate.

The Federal Reserve also twists the yield curve by dealing in long term debts and purchasing the short-term debts. Whereas in is not whole the responsibility of the federal  Reserve, as controversial as it might be, the actions of the federal reserve help bring financial sanity and stability to the market (Lloyd 245).

The Federal Reserve took such an action in the 1960s. This was the last documented attempt on the yield curve. However, scholars, financial experts and the Federal Reserve admitted that it terribly failed to achieve what was intended. The reasons attributed to the failure are derived from the complexities associated with nature and size of large active markets and the treasury. Traders deal in transactions the treasury engages itself in, the effect of this is the reversing in research the Federal Reserve intend to achieve. at any one time the market is full of speculators are bound to make astronomical profits from such information issued by the federal reserve, they however lose if they hold the bonds for a longer period because the yields went up. The actions of the Federal Reserve reward those who deal in the bond market (Mizen 532- 568).


The great recession was unprecedented as it was. Several countries including major economies, which were considered the most stable, were not left out. The United Kingdom led the way by ensuring that the bank of England was given much responsibility to control the financial sector and give early warnings. The same situation is replicated in the United States where the Federal Reserve has more power in controlling liquidity and interest rates in financial transactions. The actions of the Federal Reserve have proved to be very effective in stabilizing the economy. Other central banks also have the responsibility to watch the financial sector. The world has been reduced to a global village and therefore there are more avenues of sharing information between countries to prevent recurrence of the recession

The actions of the Federal Reserve may have been widely criticized but they were very critical in restoring market stability. Grey areas of the economy were eliminated. The Federal Reserve is now a very active player in stabilizing the United States economy




Work Cited

Arestis, Philip, and Elias Karakitsos. Financial Stability in the Aftermath of the Great Recession. , 2013. Internet resource.

Davidson, Paul. Post Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policies for the Twenty-First Century. Cheltenham [etc.: Edward Elgar, 2011. Print.

Eichengreen, Barry J. Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History. , 2015. Print.

Thomas, Lloyd B. The Financial Crisis and Federal Reserve Policy. Basingstoke: Palgrave Macmillan, 2011. Internet resource. Rhodes, Ron. The Complete Guide to Bible Translations. , 2009. Print.

Mizen, Paul. The Credit Crunch Of 2007-2008: A Discussion of the Background, Market Reactions, and Policy Responses,” Review, Federal Reserve Bank Of St. Louis, Issue Sep, Pages 531-568. , 2008. http://research.stlouisfed.org/publications/review/08/09/Mizen.pdf.