Monetary Policies: The 2008 Financial Crisis

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Monetary policies I think caused the crisis was the central banks, mortgage subprime lending, and also mortgage-backed security. In which, these complications remained some major processes in the Stock Market Crash in turn caused the Financial Crisis. The mortgage subprime lending home prices peaked in the winter of 2005-06 and then started to crumble. The Federal Reserve along with central banks tightened the belt on predatory loans and negligent lending. Interest rates were lowered to help the economy recover from the housing market bubble burst. In addition to the interest rates being lowered the President issued bail out money to help Mortgage Companies and Central Banks from the crash. However, Mortgage Companies, Central Banks, and Federal …show more content…
Generally, there are two types of monetary policy, expansionary and contractionary. (Investopedia, 2015) “Expansionary monetary policy increases the money supply in order to lower unemployment, boost private-sector borrowing and consumer spending, and stimulate economic growth. Often referred to as "easy monetary policy," this description applies to many central banks since the 2008 financial crisis, as interest rates have been low and in many cases near zero.” (Investopedia, 2015) “Contractionary monetary policy slows the rate of growth in the money supply or outright decreases the money supply in order to control inflation; while sometimes necessary, contractionary monetary policy can slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses. An example would be the Federal Reserve's intervention in the early 1980s: in order to curb inflation of nearly 15%, the Fed raised its benchmark interest rate to 20%. This hike resulted in a recession, but did keep spiraling inflation in …show more content…
This equation is obtained by a statistical regression of the funds rate on the inflation rate and on the gap between the unemployment rate and the Congressional Budget Office’s estimate of the natural, or normal, rate of unemployment. The resulting empirical policy rule of thumb—a so-called Taylor rule—recommends lowering the funds rate by 1.3 percentage points if core inflation falls by one percentage point and by almost two percentage points if the unemployment rate rises by one percentage point. As shown in Figure 2, this simple rule of thumb captures the broad contours of policy over the past two decades. Differences between the recommended target rate from the estimated policy rule (the thin line) and the Fed’s actual target funds rate (the thick line) are fairly small. Exceptions occurred during the mid-1990s and mid-2000s, when the funds rate was set somewhat higher or lower than the policy rule recommended. During 2007 and 2008, by this rudimentary empirical metric, the Fed’s lowering of the funds rate by over five percentage points was roughly in line with its historical
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