Abstract
The major purpose of the study is to capture institutional policies used by Federal Reserve to counter periods of challenges such as the great recession. In which case, the study presents a platform for learning the financial markets of an economy and also the various strategies that the existing institutions within the economy can employ to solve any arising challenges within the economy. In order to achieve the above objective, strategy used to develop this research involves a proper analysis of the state of the financial economy of the United States of America before and during the times of the great recession. The study also presents factors that led to the great recession and what policies the FED put in place as an emergency response to restore the economy back to normal. Further, a review and analysis of pre-existing studies relevant to the case was carried out to determine their view regarding methods used by Fed. This would also go a long way to evaluating the impacts that the policies had to the economy. From the research done, it comes out that the action of Fed in countering great recession come in form of lender-of-resort action and monetary policy. Among the strategies used by Fed include Use of The Discount Window, Use of special liquidity and credit facilities and money for mortgages (Lader & Lader, 2008).
OUTLINE
Background: Vulnerabilities before the Great recession
Private-sector vulnerabilities
Vulnerabilities coming in form of excessive leverage
Failure of banks to effectively apply monitoring and management of risks (Braude, 2013)
Over-reliance on short-term funding
Rise in utilization of financial instruments that are exotic
Public-sector vulnerabilities
Existence of regulatory structure’s gap
Absence of supervision and regulation
Inadequate attention given to achievement of stable financial system.
Federal Reserve Counteractions
Use of The Discount Window during great recession
Definition of the discount window in relation to how it is used by Fed
Importance of discount window to banks during great recession
Procedure for effective administration of discount window to counter great recession
Dominant auction of funds meant for discount windows
Effect of discount window on participation of financial firms.
Use of special liquidity and credit facilities
Administering liquidity to financial firms and market witnessing illiquidity problems
Rule to secure loans with a back-up of enough collateral.
The purpose of the program:
Stability of the financial system
Credit availability to businesses and households
Implication of the program on performance of financial institutions and markets
Evaluation of the effectiveness of the program
Money for mortgages
Effect of money for mortgages on great recession
Money for mortgages as quantitative easing by Fed
Fed buying large amount of mortgages to heal the faltering economy.
Stimulation of spending and reduction in long-term interest rates
Institutions and markets saved by Fed’s Lender-of-resort action
Banks:
Explore the program used for coverage
Illustrate on how the discount window was effective for covering the bank
Broker-dealer
Explore the impact of great recession on their operation, securities and derivatives (Grusky et al, 2011)
Explore the program used to save the broker-dealers
Commercial paper borrowers
Impact of great recession on commercial paper borrowers
Action of Fed in covering the individuals involved
Money market funds
Explore operations of money market funds during great recession
Action of FED in covering their operation during the great recession
Conclusion
Summary of the effectiveness of Fed monetary policy and last-resort action on the great recession
References
Lader, C., & Lader, C. (2008). AP United States government & politics. Hauppauge, N.Y: Barron's Educational Series.
Braude, J. (2013). The great recession: Lessons for central bankers. Cambridge, Mass: MIT Press.
Grusky, D. B., Western, B., & Wimer, C. (2011). The great recession. New York: Russell Sage Foundation.
