Research paper
Introduction
A general slowdown in economic activities of a given nation has various repercussions. This slowdown is what is generally referred to as recession. During this period, the macroeconomic indicators like employment, Gross Domestic Product, capacity utilization, business profits, inflation, and investment spending fall whereas unemployment rate and bankruptcies rise. From the past, this has negatively affected the living conditions of common citizens in all the nations that this business cycle contraction has occurred.
The role of the government of a nation is thus to intervene in the occurrence of a recession. For that reason, this research paper focuses on the interventions that the Federal Reserve took during the most recent recession that began in December 2007 and ended in June 2009. The research project tries to compare these actions to the strategies that were implemented in the past. Therefore, the research investigates whether these actions were successful.
Literature review
The initial thing before conducting the research was to gain extra knowledge about recession from the published materials by the accredited researchers and scholars. According to, Heinrichs, the 2007 global financial crisis had actually casted its long shadow on economic fortunes of various countries. What began as apparently isolated turbulence in U.S. housing market sub-prime segment mutated into full blown recession by end of 2007. To many multilateral agencies, policy makers, investors, and academics, this crisis really came like a surprise to them (Grusky et al 2011). In the wake of this recession, the profession of economics has essentially come under criticism from the leading scholars.
For much of the year 2008, severity of this recession was underestimated. Consequently, the leading forecasters including the World Bank and IMF made some revisions to their growth forecasts in 2008 and 2009 as magnitude of this crisis grew. There were a number of voices, which issued dire warnings of brewing storm. However, they were not really enough to catch attention of numerous who in real sense were lured into a sense of complacency in years before this crisis. A number of policy makers after the occurrence of this recession, confidently noted that no anyone could have actually predicted this crisis (Heinrichs 2012).
The Federal Reserve took various strategies to deal with this problem. For instance, Colvin in his book “The upside of the downtown: Ten management strategies to prevail in the recession and thrive in the aftermath.” explains the management strategies that the Federal Reserve used to deal with this crisis. The author goes further and compares these strategies with those that were formulated before the occurrence of this one. In an extensive research of the current recession, Young, Hamilton, Lil’, West, and Nas noted that the interventions taken by the federal reserve to a great extent helped to solve this crisis.
After familiarizing myself with the existing knowledge about this crisis, the next thing was now to collect data. The research project utilized both primary and secondary methods of data collection. The primary sources included interviews and administering questionnaires. I interviewed some economists who provided the required information about the intervention strategies that the Federal Reserve has been taking in various recessions that have occurred so as to deal with various macroeconomic problems that come with it. The questionnaires contained questions about these interventions. On secondary sources, I collected information about these interventions from various published academic sources.
Results
After collecting the data from the above sources, I realized that Federal Reserve used monetary policy as an intervention measure to deal with this crisis. The primary tool, which the Federal Reserve used under this policy during various stages of the crisis, was essentially cutting the Federal Fund rates. In June 2006, it had raised these rates to 5.25% and they remained at this level until the initial rate cut in September 2007, which was 4.75%. Federal Reserve continued to cut these rates 6 more times until they were at 2% in April 2008. Thus, the venture capital funding that previously had led to the unemployment and also slowed down creation of new jobs actually slowed down (Heinrichs 2012). This is as shown in the table below.
Afterwards, Federal Reserve paused until Lehman crisis and in October and December 2008; it reduced these rates between 0% and 0.25% which is the current target range.
Additionally, the Federal Reserve in intervening this recession employed various facilities that included Securities Lending Facility and Term Action Facility. The other tools that they used were the discount window and discount rate.
Discussion
In order to bolster financial system liquidity and stimulate the entire economy during this recession, Federal Reserve in an aggressive manner applied the conventional monetary stimulus through lowering federal fund rates to nearby zero as shown in the above table and boldly increasing its “lender of last resort” role. This therefore created new lending programs that were essential in channeling the required liquidity to financial system hence it induced greater confidence amongst the lenders. Succeeding the worsening of financial crisis in 2008, Fed actually grew the balance sheet through lending to financial system (Colvin 2009). Consequently, between September 2008 and November the same year, its balance sheet was more than doubled as it increased from under 1 trillion U.S. dollars to more than 2 trillion U.S. dollars.
In conclusion, when the Federal Reserve realized that economy credit markets were in real trouble and that the country’s economy was actually slowing sharply; they took extraordinary action as they cut the rates to almost zero and afterwards announced that they were committed to buy agency mortgage debt and longer-term Treasuries in addition to the usual short term Treasuries (Heinrichs 2012). Ever since the end of 2008, Federal Reserve has largely expanded its holding of the longer-term securities by open market purchases with an objective of putting a downward pressure on the longer term rates of interest hence supporting job creation and economic activity through making the financial conditions further accommodative. This greatly helped to reduce this recession.
Discount rate was the other tool that the Federal Reserve used during this most recent recession. In discouraging excessive borrowing, the Federal Reserve used a discount rate that was above its funds rate. Moreover, the Federal Reserve employed the discount window to lend money to the banks at its discount rate. This was intended to meet reserve requirement. This discount rate was higher than the funds rate.
In addition, Federal Reserve used various facilities that helped to reduce this recession. Term Action Facility was one of the facilities that Federal Reserve utilized in its interventions. By the late 2007, it was actually clear that changes in discount lending policy that was put in operation in the mid of August were not really working. The banks continued with their unwillingness to borrow from Federal Reserve. For that reason, the problems in interbank funding market persisted (Grusky et al 2011). Therefore, Federal Reserve officials began to search for the alternative mechanisms to inject the required funds into banking system. Among the suggestions that these officials came up with was essentially to supply the reserves by an auction mechanism. Thus, this procedure was executed in December in form of Term Auction Facility.
The other facility that Federal Reserve used to intervene was the Term Securities Lending Facility (TSLF). In winter 2008, the financial system was hit with full force by a simmering problem. All the United States Treasury Securities became extremely scarce. Thus, the Federal Reserve in response actually showed its innovation capacity through creating TSLF. This lending strives for reduction in the number of the failed securities transactions.
Conclusion
In a nut shell, all these interventions that the Federal Reserve used during this recession in one way or another were successful. Compared to the earliest strategies, these strategies greatly helped to restore the economy at a faster rate than the strategies used in earlier recessions. Thus, the instruments that Federal Reserve used to intervene in this recession were successful. Based on the Federal Reserve past actions, it is obvious that it is actually willing to protect the country’s economy in times of uncertainties.
References
Colvin, G. (2009). The upside of the downturn: Ten management strategies to prevail in the recession and thrive in the aftermath. New York, N.Y: Portfolio.
Grusky, D. B., Western, B., & Wimer, C. (2011). The great recession. New York: Russell Sage Foundation
Heinrichs, A. (2012). The great recession. New York: Children's Press.
