how was fiscal policy used during the 2008 recession
Within the week, the Fed had extended its help to investment banks and other non-bank financial institutions through the Primary Dealer Credit Facility and lowered the target funds rate to 2.25%. That may not sound like much, but it’s more than one year’s average growth rate of GDP. The government tried to use the fiscal policy to stabilize the economy by reducing interest rates, however, reducing the interest rates was limited and the government had to use its reserves.
If banks have a lot of excess reserves, how will they decide whether to keep them or increase lending? During the 2008-2009 Great Recession (which started, actually, in late 2007), the U.S. economy suffered a 3.1% cumulative loss of GDP. References. At the same time, to alleviate liquidity concerns at banks, the Fed created a Term Auction Facility (TAF), which allowed banks needing liquidity to borrow from the Fed more or less anonymously, avoiding possible adverse publicity associated with traditional borrowing from the Fed.
This caused the Collateralized Debt Obligations (CDO) securities that were tied to the housing loans to fail. Later in March, the large investment firm Bear Stearns failed and the Fed provided a loan of $29 billion to JPMorgan Chase to allow it to take over Bear Stearns rather than shutting it down.As Figure 1 shows, the economy entered a free-fall in the second half of 2008, although the grim news was not seen in BEA releases until the February 2009 release initially estimated a 3.8% decline in GDP for the fourth quarter of 2008.
Nonetheless, the current recession clearly has had dire effects on employment that are not going away quickly.In early November, Fed Chairman Ben Bernanke wrote an op-ed article for the Washington Post on "Other useful summaries of the current policy response are the 1. If banks don't increase lending very much, what effect would quantitative easing have on the money supply (currency held by public plus deposits) and on aggregate demand? One-time tax rebates such as those of ESA2008 are most likely to be added to savings or used to pay down debt by such consumers, meaning that they will not add much to aggregate demand. In particular, the market for short-term commercial paper, on which large corporations depend for week-to-week funding needs, was largely frozen by fears about which firms and dealers were solvent and which were not. Fiscal and Monetary Policy Essay In order to achieve economic objectives, fiscal and monetary policies are implemented by the government.Monetary policy is used to moderate demand and output growth while also reducing inflation in the medium term.
The Commercial Paper Funding Facility was designed to provide liquidity to that market through purchases of private commercial paper.
By taking these actions the Federal Reserve increased the money supply.Below is a graph detailing the amount of additional money supply that was created with the adjustments of the Reserve Requirements.The expectation of reducing the Discount Rate was to increase the liquidity and money supply into financial institutions and into the financial markets. Registered office: Venture House, Cross Street, Arnold, Nottingham, Nottinghamshire, NG5 7PJ. In the event of a default of the CMO security the insurer will purchase the CMO security from the buyer at the face value of the CMO security, thereby insuring the buyer from loss in the event of a default of the CMO.When more and more of the CMOs started to default the insurance contract between large investments and insurance providers came into effect. (The Federal Reserve Bank of Philadelphia compiles a Despite the lack of official GDP data indicating a recession, the Fed had lots of information by early 2008 supporting expansionary policy. These changes had far reaching global ramifications, and caused many other global economies to also suffer.The chain of events that led to recession began with the bursting of the US Mortgage Loan Bubble. The following graph shows the changes in the Reserve Requirements made by the Federal Bank and also the effect on the change on money supply.The Federal Bank continuously revised its Reserve Requirement Exemption allowing for larger amounts of deposits to be held by banks without having to hold a reserve. This resulted in the value of these securities falling rapidly.To increase to the complexity of the situation, large investment banks had agreements with insurance institutions, primarily AIG, in which their CMOs will be insured in the event of a default. Why can't the Fed push the rate any lower than zero? However, these measures proved to be inadequate in slowing down the recession as investor sentiment was still very negative.The Federal Bank went on to modify the Reserve Requirement level for financial institutions by increasing the Minimum Deposit Level and increasing the Low Reserve Tranche Level the Federal Reserve was able to increase the money supply in the market by 4.164 Trillion USD.The effects of these policy changes can be seen on the US GDP for this time period. Simultaneously the Federal Bank also increased the Low Reserve Tranche Level thereby allowing more banks to fall under the category of requiring only 3% of their deposits to be held in reserves as compared to 10% for those exceeding the Low Reserve Tranche Level. Fiscal Policy. 2007, the Federal Open-Market Committee (FOMC) declined to shift its policy stance toward stimulating the economy, keeping its target federal-funds interest rate at 5.25%. The first release of GDP for the fourth quarter of 2007 were released in February 2008 and showed GDP increasing at a sluggish 0.6% annual rate. The crisis began with the Sub-Prime Mortgage loans beginning to show defaults.
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how was fiscal policy used during the 2008 recession
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