Question One
The deadly economic crisis that hit the US since the year 2007 placed several challenges to bank institutions that had not been experienced for several years. This called for the Federal Reserve under the watch of Federal Government to come up with innovative ways of addressing this threat so as to prevent further worsening of the situation. To tame liquidity and counter credit crisis stimulus packages and policies came to play. These included promotion of public understanding of Fed’s inflation objective to avoid development of deflationary expectations, issued guidance on expected future course of the new policy interest rate, procured large amounts of long period securities with the goal of increasing their volumes in bank reserves. This has been done to help cushion the market from adverse effects of this crisis as well as help recover from the crisis.
The policy tools adopted by the Federal Reserve included reducing the lending discount rates to ensure the banks possess more credit. Prolonged maximum maturity of loans advanced to banks to 90 days from overnight. It also gave discount window credit through frequent auctions with a bid to discourage bank’s reluctance to borrow at the window as a result of sigma associated with borrowing from Federal Reserve. To ensure dollar liquidity the Federal Reserve lent dollars to major central banks to reduce pressure on money markets. At the peak of the crisis, the Federal Reserve created emergency liquidity facilities to extend funding to non-bank participants in the market such as primary securities dealers, buyers of security loans and money market mutual funds.
Question Two
Economists define deflation as a fall in the price index of consumer and or producer commodities. Deflation is occasioned by either supply side reasons or demand side reasons. Supply side deflation is welcome as is occasioned increased productivity leading to a fall in consumer price. Wages remain steady as prices fall fostering progress. Federal Reserve needs to have a close watch to price commodity to avoid adverse effects of deflation. The Fed pumped $600 billion to the banking sector to encourage recovery by purchasing government securities. Deflation brings tremendous benefits to the consumers as the value for money increases. In this respect, consumers purchase more using less money. The interest rates on loans go down as well as mortgage rates. Retired workers on fixed incomes also benefit more as they share the gains from rising productivity. The manufacturers on the other hand suffer due to deflation as they reduce the commodity prices irrespective of the cost of manufacture. According to Keynesian / Classical theory, deflation occasions reduction in interest rates enabling customers to service their loans comfortably. As a result, there arises increased investment as mortgage rates go down. The housing sector in turn grows.
Question Three
Recession arises when there is no economic growth for more than six months while deflation occurs when commodity prices decline. Deflation can occur both with recession and independently. Deflation worsens recession since it forces price commodities to reduce despite there being stagnation in production due to recession. The Federal Reserve needs to implement policies that cushion the economy from negative effects of deflation especially if it is demand side deflation. One such policy is injecting more money to the banking sector to avail money for lending.
Question Four
According to the video article, it is reasonable enough and advisable to reinstate Glass Steagall to his former position. This is because the happenings that occasioned his dismissal were caused by economic forces and variables beyond his salvage. His actions were intended to try and save the institution from the effects of harsh economic crisis.
Question Five
According to Dodd Frank, there is little regulation of the financial sector and proposes establishment of Financial Stability Oversight Committee to regulate the finance sector. The financial sector does not have adequate influence in making laws since they lack necessary tools to respond to economic crisis. Banks play a vital role in the economy and should not be subjected to conditions that threaten their successful operation. They should be cushioned from such.
Question Six
The present economy is in a liquidity trap as most agencies liquefy their assets pursuant of the economic crisis that raged the economy. Policies advanced to stimulate the economy risk failure as most agencies may not be ready to adopt them.
Works Cited
CHAN, SEWELL. Deflation Concerns Diminish at the Fed. Web. 04 Jan 2011. 07 Feb 2013
Kohn, Donald L. Federal Reserve’s Policy Actions during the Financial Crisis and Lessons
for the Future. Web. 13 May 2010. 07 Feb 2013
Madison, James. Financial Regulation: A Primer on the Dodd-Frank Act. Web. May 2011. 07 Feb 2013
Wagner, Richard E. Why So Much Concern about Price Deflation? . Web. 2002. 07 Feb 2013
