Global Financial Crisis

ECOP 3019
Question 5

Stocks tumbled, with the Dow Jones shedding more than 777 points, its worst one day loss as the House of Representatives barred a US$700 billion bailout package. [1] International capital markets collapsed, while the Dollar (USD) rallied on extreme risk aversion. Nations who lacked the foreign reserves to support their liabilities became victims of a credit crunch, while survivors of the Great Depression from the likes of Lehman Brothers and Washington Mutual folded. From all corners of the globe, millions lost their source of employment as economies slipped into the stages of economic contraction not seen in generations. Indeed, the Global Financial Crisis (GFC) was a horrific period that ultimately required extraordinary policy responses to provide liquidity and stabilise global markets.

To cope with the GFC and its aftermath, the Federal Reserve System (Fed) of the United States (US) along with other major central banks including the European Central Bank, Bank of Japan and the Bank of England, has practiced unconventional monetary policy to reduce downside risks to growth and repair crippled markets. By far one of the world’s largest financial agents, the Fed has been the backbone of the US economy since its establishment in 1913. The institution provides banking oversight, financial services to depository institutions, the government and international bodies in addition to regulating the money supply to achieve maximum employment, moderate interest rates and stable consumer prices, including the prevention of deflation or excessive inflation. [2] As the sole actor of monetary policy in the world’s most influential economy, the Fed has become an enormous provider of liquidity and stability, not just to US institutions, but to global banking giants as seen recently with the onset of the European debt crisis.

When credit markets froze and banks collapsed in 2008, the Fed lowered interest rates towards zero percent and increased its...