Sample Business Studies Paper on The Fed and the Great Recession

The Fed and the Great Recession

Outline

  1. Introduction

Thesis: The Federal Reserve did not handle the crisis effectively because it failed to determine its magnitude and left questions as to how much it will actually regulate the financial institutions referred to as “Too Big To Fail Banks” in the coming years.

  1. From the viewpoint of the Austrian school of monetary theory and policy, the Fed was responsible for the Great Recession, and it failed to react to it effectively.
  2. A financial crisis denotes the misappropriation of otherwise useful resources.
  3. The Fed did not act appropriately to resolve the Great Recession.
  4. The Fed acted wrongly by bailing out insolvent financial firms.
  5. In contrast to the idea that the Fed mitigated a meltdown of financial systems and reduced the consequences of the Great Depression, its actions made an already bad situation worse.
  6. The Fed perpetuated the very structural imbalances that instigated the Recession in the first place.
  7. Conclusion

 

The Great Recession was a deep financial crisis in the United States that lasted between 2007 and 2009. For several years, the economy failed to return to the output and employment levels before the crisis. The Federal Reserve did not handle the crisis effectively because it failed to determine its magnitude and left questions as to how much it will actually regulate the financial institutions referred to as “Too Big To Fail Banks” in the coming years.

From the viewpoint of the Austrian school of monetary theory and policy, the Fed was responsible for the Great Recession, and it failed to react to it effectively. The appropriate reaction to the failure of big banks would have been to let them to fail to facilitate an economic de-leveraging and increase savings and investments (Kroft et al., 2016). A financial crisis symbolizes a misallocation of useful resources, and the most suitable policy reaction is to allow participants in the market to redirect resources to higher-value uses from those with low values. That is, once investments are determined to be mistakes, it is important to let market forces liquidate the bad investments as fast as possible to make them usable for other objectives. Certainly, human and physical resources cannot be rapidly reallocated to other uses without incurring costs. Nevertheless, the contracting entities should be allowed to renegotiate the utilization of resources without the Fed’s intervention. The existing techniques for liquidations such as bankruptcy should have been applied where appropriate.

The Fed did not act appropriately to resolve the Great Recession. In collaboration with the Treasury department and the Obama and Bush regimes, it acted wrongly by bailing out insolvent financial firms. Further, it injected trillions of dollars into the financial system thus increasing the monetary base and industrial concerns. It means that the Fed’s ideology was to mitigate, as much as possible, investors from liquidating any bad investments in the effort to prolong those bad investments as long as possible (Bianchi & Melosi, 2017). Instead of undergoing through bankruptcy and reorganization, banks that became insolvent were given billions of dollars to salvage them. Such a move only acted to increase the severity of the financial crisis.

In contrast to the idea that the Fed mitigated a meltdown of financial systems and reduced the consequences of the Great Depression, its actions made an already bad situation worse. The Fed perpetuated the very structural imbalances that instigated the Recession in the first place. The problem with the current U.S economy is not the lack of effective aggregate demand, as framed by Keynesian economists, but a structural imbalance created by over 20 years of cheap credit (Bianchi & Melosi, 2017). These are imbalances the central bank is trying to permanent (for instance, by maintaining the discount rate close to zero in the last few years). The hard situation that the Fed faces (structural imbalance), forced them to perpetuate the financial crisis rather than intervening effectively.

The Fed failed to handle the Great Recession effectively because it failed to determine the magnitude of the disaster and left questions as to how much it will actually regulate the financial institutions referred to as “Too Big To Fail Banks” in the coming years. The moves made by the Fed only acted to increase the severity. Consequently, the American economy has been left in a vulnerable position.

 

References

Bianchi, F., & Melosi, L. (2017). Escaping the Great Recession. American Economic Review107(4), 1030-58.

Kroft, K., Lange, F., Notowidigdo, M. J., & Katz, L. F. (2016). Long-term unemployment and the Great Recession: The role of composition, duration dependence, and nonparticipation. Journal of Labor Economics34(S1), S7-S54.