The Federal Reserve: The Workings

By | March 8, 2014

Federal Reserve

The aim of the Federal Reserve is to look after the American economy; it is a way that allows for the protection of the economic growth and development. The original aim was to consider the working of the economic growth and allow the means to support the country by increasing the amount of money that is circulating or decreasing this amount.

If the Federal Reserve decreases the amount of money that is in circulation, it can slow down the growth of the economy; if they increase the money that is available, it means there is more money in the economy.

Giving the Federal Reserve the control to manage the economy was created to help the economy from becoming stagnated, where there is no growth. But many people consider the Federal Reserve is responsible for the situation which is causing the many problems that are happening with the financial problems that America is currently facing.

The Federal Reserve is promoting the growth factor by dropping the amount that a bank needs to hold onto in reserve, for the deposits that are placed with the bank. The amount of credit that is available is rising daily; we live in a society that promotes the using of credit to be able to apply for even more credit.

The low rate of interest that was continued for a longer period than many people thought was wise. This has inadvertently helped to promote the mortgage crisis that developed in and around the 2007 market crash of the housing markets.

Money was being lent out to people who had no ability with which to return the loaned money before defaulting. This led to a worldwide crash of the financial markets because of the practice of selling-on bad debts to different establishments around the world, spreading the risk and the ability to lose financially.

If the Federal Reserve had acted sooner, many believe that the crash would have resulted in a reduced loss and this could have prevented many of the problems that were experienced and the near complete collapse of some of the banking institutions across the world.

The banking crisis

The banking crisis occurred because of the amount of money that had been lent to customers, who didn’t have the funds with which to pay the money back. In some cases, they were lent more than the value of the property. This doesn’t make financial sense and yet it was allowed to continue. If the interest rates had been increased sooner, then the potential crash would have cost the world a lot less.

The crash could potentially have still happened and money could have been lost, but the amount of the loss would have been considerably lower and this would have resulted in a lower global impact on the financial markets worldwide.

Therefore, many people consider the actions of the Federal Reserve as potentially slow in reacting to the market conditions, adding towards the financial crisis that was felt and is still having repercussions now.

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