UNDERSTANDING MONEY AND BANKING

 

Money And Banking

Until in 2007, advance in monetary economics had led to academic economists as well as, policy makers to argue that there was a well definition of monetary policy in regards to the Federal Reserve. The Federal Reserve also known as “the fed” defines the monetary policy as an action it undertakes the government to influence the availability as well as, the cost of money and credit. Study shows that the expectations of market participants always play a significant role to determine prices and growth (Wicker pg. 132).  Monetary policy is also defined as the policies, statements and actions of the fed so as to influence how the future is perceived. Therefore, the fed in this case acts as the last resort or the lender to the nation’s financial system, for instance, the fed ensures that there is a continued smooth functioning of the financial intermediation by ensuring that they have provided financial markets with an adequate liquidity. In summary, this paper will give a report on the monetary policy of the Fed (Open market operation, reserve requirement, discount rate) during the economic crisis between 2007 and 2009.

The congress for many years have delegated the responsibility for the monetary policy to the fed, however they retain an oversight responsibilities of ensuring that the fed adheres to the statutory mandate of long-term interest rates and maximum employment. The aim of the fed is to ensure that the nation’s central bank falls into categories of monetary policy to ensure that there is financial stability through the lender of resort function as well as providing payment system services to the financial firms and to the government. Traditionally, it is evident that the fed implemented monetary policy through open market operation, reserve requirement and discount rate. Open market operation majorly involved with purchasing and selling of the United States Treasury securities. The fed conducted the operations by ensuring that interest rate targets are set, this was significant in that it allowed the fed to fulfill its statutory and legal mandate of stable prices, maximum employment as well as, moderate long-term interest rates. Therefore, it can be evident that the interest rate targeted are the federal funds rate, which are the price at which most banks buy as well as, sell reserves on an overnight basis. This federal funds rate can be then linked to other short-term rates like economic recessions and inflation expectations, which in turn will influence the longer-term interest rates.

Consequently, Economic recession takes place when there is a fall-off in demand of consumers. When there is a slow growth, most businesses fail to expand making them not to hire new workers. In this case, recession is said to be underway although, it only affects people when layoffs begin. The U. S has become a victim to economic recession and most experts have given their views regarding the situation. For this case, the Government of the U.S needs to know that they are the key players for stopping recession and diverting economy to growth path. The government should also focus on how to increase money circulation, the debt level of per capita and any other causes of recession.

 

Conversely, interest rates are renowned to have been affecting the interest-sensitive spending such as the business capital spending especially on plant and equipment, residential investments as well as, household spending on consumer durables. Through this, monetary policy can be used to slow aggregate spending in the short run (Hetzel, pg 172).  A stable rate of inflation is significant in promoting price transparency however, monetary policy is said to affect inflation in the long run. According to the report submitted by the fed government, it is noted that direct lending is significant in response to the financial crisis, as a result, the fed managed to create a number of new ways of ensuring that they inject reserves, credit, as well as, liquidity into the banking system, and making loans to firms that are not banks. This was significant because these allowed the people to pay back the loans with interest.

For instance, according to Raymond, he argued that in order to resolve the issue of negative impacts of interest that affects the economy, the U.S president should lower the interest rates to enable business and consumers to get back on their feet. I believe this will help in resolving the problem because credit access should never be barriers for a justifiable enthusiastic entrepreneur for starting a business, therefore reducing interest rates will fortunately stop this. I therefore believe that, the U.S president should have his hands to steer this aspect by balancing interest rates as well as, inflation. When inflation increases, interest rates should also increase to discourage borrowing (Brezina, pg. 123).

Conversely, according to Kathy Lee, she also argues that the U.S president should raise taxes while reduce government spending. The U.S government should give tax to encourage the citizens of U.S with enough money for saving and investing in stocks, bonds or start businesses to enable new job created and money that lies idle in bank is routed to healthy use. On the other hand, I also agree with Patricia advice regarding the Federal Reserve. It is true that government should encourage selling of bonds and raising the requirement of the bank reserve since it will improve the stability of many banks to customers’ deposits. Lastly, I also believe that the U.S President should raise interest rates as well as, encouraging savings. I agree to this argument because since people without saving is said to be roofless. The president should encourage saving starting from the micro-economics to macro-economic and aliasing with the congress by giving out tax sops to the citizens abroad, which in turn bring back money to the country to invest there. The graph below represents the fed funds rate target.

 

 

Works cited

 

Brezina, Corona. Understanding the Federal Reserve and monetary policy. New York: Rosen Pub., 2012. Print.

Hetzel, Robert L.. The monetary policy of the Federal Reserve: a history. Cambridge: Cambridge University Press, 2008. Print.

Wicker, Elmus R.. Federal Reserve monetary policy, 2007-2009. New York: Random House, 2007. Print.


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