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The Federal Reserve and the Financial System
Introduction
The Federal Reserve came under overwhelming criticism during and after the 2007/2008 global financial crisis. Economists and the public alike were quick to lay the blame on the Fed for allowing the countrys financial system to crash. Globally, the role of a federal reserve is to keep track of a countrys financial system and protect the system from economic challenges. Created by Congress, the United States central bank is responsible for creating a flexible and stable monetary and financial system (Koukoulas par. 3). This paper seeks to prove that the Fed has been working hard to protect the stability of Americas financial system amid criticism that it has failed.
Functions of the Fed
The Fed is responsible for creating monetary policies through money and credit conditions in the economy to ensure and enhance employment and stable prices for goods and services (Koukoulas par. 2). This is for the benefit of the public and this function increases the value for money. The Fed is also responsible for monitoring and regulating the banking industry as well as other financial institutions (Koukoulas par. 2).
This ensures that consumers credit rights and the financial system are protected. It also monitors the financial system to contain risks that may arise in the financial markets hence protecting the financial markets from a possible crisis (Koukoulas par. 9). In addition, the Fed is the main banker for the US government playing a very important in overseeing the countrys payment system (Koukoulas par. 9).
Saving the countrys financial system
During the 2007/2008 global financial system, the United States government was forced to make aggressive monitory policies to save the economy. The Fed under the leadership of Ben Bernanke was instrumental in leading the country out of the crisis. At the peak of the economic meltdown in 2007/2008, Bernanke took a brave stand and refused to increase the interest rates. On the contrary, he lowered the rates to allow trouble firms and mostly the financial institutions to have more funds (Zuckerman par. 8). This policy was the only hope for the sustenance of mortgages, money markets funds, commercial paper, auto loans, and student loans (Zuckerman par. 8).
The Fed was very confident in its role during the crisis and the brave measures it took are to be celebrated. The banks decisive decision helped the country and consequently the entire global economy to rise from the worst depression ever. Using its balance sheet, the Fed bought short-term bills, long-term bonds, and mortgages to manipulate prices (Zuckerman par. 8). This brave move forced the interest rates to go down hence reducing the price of borrowing in the money markets. The Fed knew that the policies that could save the economy at that time were risky and costly at the same time. Nonetheless, it was prepared to take the risk to save the nations financial system.
Without the power to perform its policymaking function, the Federal Reserve may not be in a position to save the economy in the future. The economic stimuli granted by the Fed were nothing short of brave measures to do what had to be done in the interests of the nation. Limiting its power may be detrimental to the protection of the taxpayer. The 2007/2008 economic depression is proof of this fact. Financial system management involves risks and the existence of such risks should not form the basis of incompetence. The ability to take financial risks was the only hope that the United States of America had to circumvent the effects of the great depression.
Conclusion
This paper has counteracted the thought that the Federal Reserve has failed the national financial system in the US. The paper begins by outlining the functions of a Federal Reserve to understand its mandates in a financial system. The paper goes on to prove that the Federal Reserve was proactive during the economic meltdown and that its policies helped to recover the financial system. The paper disagrees with the calls from critics to reduce the mandate of the Fed and limit its powers.
Works Cited
Koukoulas, Stephen. Bernankes caution and patience saving the US economy. 2013. Web.
Zuckerman, Mortimer. Mistreating Ben Bernanke, the Man Who Saved the Economy. 2013. Web.
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