The Role of Monetary Policy in Housing Market Developments
Introduction
In light of the question, what role did the setting of monetary policy play in housing market developments? This paper will examine what role monetary policy had in the housing bubble and consequently the financial crisis of 2007-2008. Next I will briefly look at how monetary policy is utilized and what obstacles are faced when considering the appropriate policies to influence the economy. Finally, I will explore other factors that may have had an impact on the crisis.
Discussion
Dokko et al., (2009), concluded that the low interest rate, experienced as a result of the 2001 recession and kept low for a substantial amount of time, throughout 2004, was only a minor
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It does this by the buying and selling of federal bonds, changing the discount rate, or changing reserve requirements (Rittenberg, & Tregarthen, 2009, p.262). The main goal of monetary policy is to avoid a recessionary gap or contrarily an inflationary gap. Maintaining stability by predicting the future direction of the economy and taking measures to counteract any fluctuations in the economy. The largest challenge facing The Fed in its decisions to implement policies would be the problem with lags. Recognition lag is the delay from when a problem arises to when it is realized, often a matter of several months. Implementation lag is the time from recognition of the problem to the enactment of a policy to deal with it. Finally impact lag explains the delay from the enactment of a policy until it impacts the economy. The combined lags in the process of implementing a monetary policy may take years before any results are seen (Rittenberg, & Tregarthen, 2009, pp. 267-268). Economists do not always agree on which policies are the most effective and …show more content…
With the repeal of the Glass-Steagall act of 1933, investment and commercial banking operations could merge, giving investment banks the incentive to take greater risks, lowering equity requirements. Calabria, (2009), argued that in fact financial regulators and regulations increased in the past decade, contrary to what many people believe. Calabria goes on to point out that the down-payment requirements of obtaining a Federal Housing Loan have been greatly reduced from 20 percent in the 1930s to only 3.5 percent as of
Overall, the federal government was never really hands on in housing, that changed in the 1930’s when the Federal Housing Administration (FHA) was created to be apart of the New Deal. After the Great Depression, the FHA sought to rebuild the housing market by introducing the mortgage lending system, that is still used today. The FHA actually did quite the opposite, “instead, the FHA adopted a racial policy”, that took advantage of racial covenants and insisted properties that were insured by them to use those covenants. The FHA introduced redlining policies in many American cities and with the Home Owners Loan Coalition (HOLC), a federally-funded program created to help homeowners refinance their mortgages, it seemed that it would never end.
Principles of Macroeconomics ECON210 -1601B-10 Instructor: Kunsoo Choi Unit 3- Fiscal Policy and Government Spending Amanda Kranning March 6, 2016 Fiscal Policy and Government Spending Part 1: Assuming that the country (United States) is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year. Then the fiscal and monetary policy can be applied to move the numbers to acceptable levels while keeping inflation at the lowest level.
To increase reserves the FED buys securities and pays for them by making a deposit to the account maintained by the FED. The FED lower reserves by selling securities and collects from those accounts. These sales and purchases of securities are done under the supervision of the Federal Open Market Committee. The FOMC uses this tool to control the interest rates and money supply in the US economy( www.federalreserveeducation.or g, n.d.). The simplest answer as to why the FOMC tinkers with the sales and purchase are the goal of maintaining a balance or equilibrium in the economy in the US.
The Fed is often aiming to achieve a goal of maximum employment or near-zero unemployment. However, the goal of maximum employment conflicts with the goal of stable prices. Usually, the Fed aims to reduce prices, but that usually causes unemployment to rise. Generally, attempts are made to guarantee that there aren’t any significant price drops or increases.
The Glass-Steagall Act of 1932 permitted the use of government securities to back Federal Reserve notes. It also separated personal and investment banking. During The Great Depression, many banks were involved in personal and investment banking. Investment banking is much riskier than personal banking so problems in the investment banking business effected the personal banking business. However, Glass-Steagall had much less impact than Hoover originally thought because it was too late.
“If you want to understand geology, study earthquakes. If you want to understand the economy, study the Depression” (Ben Bernanke Quotes). Ben Bernanke, a tenured professor at Princeton University, served two terms as the Federal Reserve chairman from 2006-2014 and orchestrated the Fed’s actions during the Great Recession. Being a student of the Great Depression, Mr. Bernanke’s policies and regulations surrounding the late 2000’s crisis reflected the adaptations to the Fed’s failed actions in the 1930’s. Throughout economic history, the stability and health of our economy depends on the balance achieved by the Federal Reserve over their three major roles: Monetary Policy, Regulation, Lender of Last Resort.
Congress created the Federal Reserve System, which is the central bank, on December 23rd, 1913. Dual mandate, which is the Fed’s main goals, focuses on maintaining low inflation and having a low rate of unemployment; allowing the Fed to have a clear objective in what they are trying to accomplish. The main roles of the Fed in the U.S. economy are open market operations, open market purchases, open market sales, the discount rate, and required reserves. Thus, it revolves around monetary policy and creates different ways to alter and affect how the economy is running.
Investors tried to withdraw their reserves and unfortunately even the banks had invested in stock. Firstly, this essay will discuss and look at the monetary
It controls interest rates through the federal fund rate, which is correlated with the prime rate of lenders. If the economy is growing too fast and inflation is on the rise, it will “slow” the economy by raising interest rates. These raised interest rates cause people to borrow less, and thus inflation decreases. If the economy needs to be catalyzed, the Federal Reserve lowers interest rates. This causes people to borrow more, thus stimulating the economy and raising inflation.
The tool that is mostly utilized by the Federal Reserve is the so called Monetary Policy, which is best described as the activities that the Federal Reserve assumes in order to create a change or affect the credit and the amount of money that circulates in the U.S economy. By changing the amount of money and credits circulating through the economy, the Federal Reserve is able to control or have an effect in the cost of credits also known as interest rates, which would result as lower prices in interest rates, factor that promotes and positively affects the U.S economy. There are three tools that the Federal Reserve utilizes to influence the Monetary Policy: one is to buy and sell U.S securities in the financial markets, also known as open market operations, which main purpose is to influence the level on the reserves in the banking system, as well as
The Federal Reserve controls over the federal fund rates give it the ability to influence the general level of short-term market interest rates. The Fed has three main tools at its disposal to influence monetary policy which are the open-market operations, discount rate, and reserve requirements. b. Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and rate of the money supply, which in turn affects interest rates. The concept of Monetary Policy simply stated is that the cost of credit is reduced, more people and firms will borrow money and the economy will heat up. c. The controls that Federal Reserve used worked because the use of the three main tools the Fed uses is the most important that can manipulate monetary policy.
Established by an act of Congress in 1913, the Federal Reserve System had several goals, including stabilizing the economy, regulating the money supply, and preventing bank failures. The Federal Reserve has played a vital role in the country's financial system, and its policies have had a significant impact on the economy over the years. Its creation was a major step towards establishing a more stable and secure financial system in the United States. The Federal Reserve System has not met its goals of greater stability and low inflation, which is just further examples of the problems with it. Unfortunately, it was also created for the purpose of making credit more readily available, which drives the country further into debt.
The Fed’s main desirable goals are low unemployment, economic growth, price stability or low inflation, and financial market stability. The Federal Reserve’s profession is to also encourage a “sound banking system” and a well economy. To reach this goal, the Federal Reserve has to fulfill as “the banker’s bank, government’s bank, and the nation’s money manager” (Investopedia). The Fed also sells and saves the government’s securities, which supplies the country’s paper currency.
Keywords: Monetary Policies, Central Banking System, Regulating Wealth, Money Supply, Inflation, Reserve
Introduction The central bank of the United States was founded by Congress to provide a safe, flexible and stable monetary and financial system. The Federal Reserve carries out the nation’s monetary strategy guided by the goals set forth in the Federal Reserve Act, namely "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. " The central bank, also known as the Federal Reserve System is made of a central governmental agency in Washington, DC, the Board of Governors and 12 regional Federal Reserve Banks in major cities throughout the United States. Body