Geithner & Bernanke Amid the Global Financial Crisis1. From the breadth and depth of the economic downturn, it was clear that no one single policy action would address the problem. Briefly discuss how the various actions taken by the Treasury and the Fed served to work together or possibly against one another to address the problems.
2. How did the backgrounds of both Geithner and Bernanke serve to assist or hinder them in understanding and acting to solve the problems?
3. “The biggest problem we now face is how the Treasury and Fed can withdraw from the heavy level of financial support that they’ve provided without plunging the economy back into a recession.” Please comment on this proposition.
Note on Money and Monetary Policy
- Following the stock market crash in October 1987 and the terrorist attack in September 2001 the Federal Reserve rapidly increased the amount of money in circulation and lowered interest rates. Why did the Federal Reserve take these actions and what impact do you believe they had?
- From early 2005 through August 2006, the Federal Reserve steadily raised short term interest rates, being concerned about potential inflationary pressures.It then held short term rates steady through August 2007, saying that it remained very watchful about possible inflationary dangers.However in September 2007 it suddenly dropped rates and took other steps to aid capital market liquidity. Recently short term rates have been maintained at extremely low rates (effectively zero percent for a while). Now there are fears of a double-dip recession and potential deflation on one hand and other fears of potential high inflation in the foreseeable future. If you were sitting on the Open Market Committee today, how would you go about deciding what policy path to take, particularly given the lag in the effect of some monetary policies on the real economy?