Question

"The nature of the financial turmoil that began in August 2007 rendered traditional monetary polley responses of Federal Reserve ineffective". With reference to the above statement, discuss the Federal Reserve's response to the financial crisis 2007-2008 and actions to foster maximum employment and price stability. Discuss the unconventional monetary policy (quantitative casing) undertaken by FED to help stimulate the economy and bring it out of recession. Describe all the phases of quantitative easing and implications of FED's policy measures on the economy as whole. Research Paper II.pdf

Answer 1

Since lai tally days of 2007, the crisio had caited to me pare ite hase. nise Wher was a sharp chest - up (value, an unexpected as well as unpreceduled) in the housing prices in US.- there nece high level of borrowings by the onner m. na faction of the inflation adjusted valere.) The credentiality or the quality of the necely emanated mortgages at that time started experiency A tady decline the consibratia. use nootgoger ---- Were penicious in A sense. - Achally they were intertwined which formed the collateral and here commonly ug anded as Mortgage-Bached Securities. They surpassed the Gernment - raponord enterprises, which haditionally controus mis domain The Housing- Asset - Bier - Bubble exploded on Om August 2007.. The Central Bank started supplying huge resence to support the interbank lending gations. But me Simation continued to worsen - me qread on 3 months W ir weinigut interbank loans explozled Slovely, it became shear as daylige that the traditional Central Banko tools necce not enough to withstand tir" temi ble nisis. fed started to Mink immediately about the possible wayan ka and responded accordingly. They created had lending procedures - by means of TAF (aum Auction facility) and Piper (Primary Dealer credit facility.). by forming TS Lf (tem securities sending facility) the secondes lending program was also altered. TAF offerid commercial banka funds through an anonymous ac auction facility which removed the monal discount bormo stigue. Poef helped in expanding are rights lending procedure from commercial to investment banks. Tslf was formed to deal with side of bormwing Treasury bills , Notes and bonds using mungoge bached securities as comarcal. These programs had one common feature - They offered mat favorable interest rates , but only for a month or to ( ( Apart from these innovatine techniques (to racule the scenano.), the periarty known fundamental techniques were also restructured and adjusted. The normat temporary repurchase agrement enperienced an increase in their tem to 28 days; Mey accepted Mortgage bached secuitter instead of normal Treaseny Recruihts

The swap : connections by w European Central bank and the Swiss National Bank peale deformed and expanded - which helped in casier transaclian To offer commercial banks. There is a common raying - a Teo. Big to fail" - used in me context of financial organizations en wwen R no big or important to the economy of a cruing that a government on Central Bank must adopt some measures to prevent it from cearing to brade or going bankrupt. Band on that Idea - The Fed provided a loan to innestment bank bear Stearns no that it could remain in operation; to be taken over by JP Morgan Chase these newly applied techniques or operations were starkly different from those used previously. The Central Bank has a balance sheet of me eulii financial pamers ook; the management aout a liabilehe au governed by two general principles. – nee are mentioning more below to point out the difference in opuation bſn the pre-crisis and pest-cuck ha 0 the size a the beo balance sheet ine. The monchny base was conholled by the policy makers, fed officials kept ene market determine fedeal fund rates war the target by changing me level of the monetary bare. 1 fed has sole control on me holding of its assets; ie me anet composition pattern was solely governed by central Bank. Each of Mie new programs implemented in red indicated the changes in it arsel holdingo By March 2008, the red had undertaken the following programs to broot up the declining situation of me economy ments ik normal state. i) $100 billion to the Term Auction facility (TAF) lie) $ 100 billion to an Term secmties Lending facility (TSLF) 1) 430 billion to me Rimay Baler credit facility (PDCF) iv.) $100 billion to mie 18 dag depo of mortgage bached seemühes vi) $29 billion to a loan to support the sale of Bear steams viy t 36 billion to foreign enchange swaps.

All of these above mentioned the relative price of financial asser above mentioned changes nerve intended to revive or to influenco. e price of financial assir - te. the interest rate spreads At that have officiala main may of hope was to reduce mi cost of 3- nwth interband loans and Me spread to US Agency Secmitico and the Equivalent Marnity Treasiny Rare. Onantitative Eoving Central Banks had the responñbility to keep inflation under surveillance Before me financial civir on 2008, the main operating tool was nie adjustment of interest rates ; at which banks borrowed overnight. When me ciris was in full swing, Big Central Banks line the Red along with Bank of England reduced their enight interest rates for providing bont to me economy. But the economy failed to recover neuen "at zero interest rate .. that failure in a way forced the Centre Bank to think differently - ie to use their wayow's to encamage banko to drain money into me economy. Quantitative Earing (QE) was one of those wayout. In this process, QE, the Central Bank cuates money by buying seminta - such as government bonds, from banks, with electronic care that did not enüt pior to that the new money burges the size o bank resernes en un conomy by means of the quantity of assets purchased- therefore emanates the name 'Quantitatine kasings. The main rdea behind QE N straightfono and Banks take the new money and bug asses to replace lee na ones which they have and to the Central Bank. Is a moult it raises the stoch price and book the investment My lowering the interest rates. If QE cominces markets that the central Bank is serionly dealing with deflation or high unemployment then it can also boost economic activity by rasting confidence. Being me financial cutit Me Fed samched QE buying millions o dovan a genermnat bonds and mortgege-bached secuure. It worked as well. Bw 2008 to 2015 fed's balance shet too rose from $900 billion to F45 hinim.

this unconventional policy send us from that severe nisis. It concered even Me long-term interest vares. After a nine-years, one can say that the Central Bank had acquino a nad territory by starling off with with a billion. donar balance sheet.