Archive for January, 2012
The laws that encouraged high-risk lending to homeowners are still in place, and Fannie Mae and Freddie Mac are still doing their best to subsidize home purchases by individuals who are financially unprepared to meet their obligations. The risks of this policy are compounded by the Fed’s decision to allocate credit on a grand scale throughout the economy. Read more
As we discuss more fully in Chapter 20 , the latest recession confirms the pivotal role that the Federal Reserve can play when there is a financial panic. By acting as a lender of last resort, the Fed has the capacity to stave off economy-wide financial meltdowns. This was the role originally intended for the Fed back in 1913, and one that it failed to perform in 1929–1933. Read more
Thus, for long after the panic of 2008 was over, recovery from the recession was impeded because banks have been earning interest on their excess reserves rather than making productive but risky loans to the private sector. The sluggish credit market led the Fed to announce that—for the first time in its history—it needed to get involved in making loans to entities other than commercial banks or the federal government. Read more
Amid the chaos surrounding the financial panic and the recession, not many commentators paid much attention to two changes in Fed policy that enlarged on a massive scale its role in allocating resources. First, the Fed asked for and received from Congress the legal authority to pay interest on the reserves held by the banking system. Read more
First, there is the matter of “what might have been†had the Federal Reserve not stepped in aggressively to end the financial panic of 2008. Many economists agree that if the Fed had not acted, the consequences could have rivaled those experienced in 1929–1933, when output fell 30 percent and the unemployment rate hit 25 percent. Second, the housing market was utterly devastated in the recession of 2007–2009, to a degree not seen since the 1930s. Read more