The article I have selected is titled; Plugging Holes and is taken from The Economist print edition of March 13, 2008. This article is related to chapter nineteen i.e. Understanding Money, Banking and Credit of our book. It is specifically related to the content about Federal Reserve System covered in the text.
The article discusses “the turmoil in the credit markets” (Plugging Holes). It highlights the defensive mechanisms put in place by the Federal Reserve Bank (Fed) to tackle this turmoil. The Fed is providing a liquidity cushion to the credit market by a “new scheme under which the central bank would provide up to $200 billion of Treasury bond to market-makers in return for dodgier assets, such as mortgage-backed securities” (Plugging Holes). Doing so it is directly serving the purpose of its mission; “to maintain an economically healthy and financially sound business environment in which banks can operate” (Pride, Hughes & Kapoor, 632).
Pride, Hughes & Kapoor cite in the text book that monitoring the nation’s money supply(through its monetary policy) to provide impetus for economic growth, is the most important function of the Fed. The article sheds lights on desperate defensive measures undertaken by the Fed to address the volatility in the bonds and credit market. The investors in the credit market have become jittery and are unwilling to invest in riskier bonds and the demand for safer government securities has increased. The wider spreads and increased volatility has led banks to charge more to borrowers. This activates a loop of effects that dents the economy. As volatility increases, collaterals charged to borrowers increase, it puts upward pressure on interest rates in turn effecting borrowings and on the whole tainting economic progress. Therefore, the Fed is exercising control over credit market to safeguard economic interests and ease off volatility in the credit market.
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