Sample Essay

Introduction and Article Summary

The article selected states the stance of the Federal Reserve (central bank of US) towards further cushioning the easy monetary policy already in place and the positive impact on US economy that it hopes to accomplish. It describes the decision of Mr. Bernanke (chairman of Federal Reserve) to further increase the buying of Treasury bonds (amounting to $300 billion), mortgage-backed securities (amounting to $1.25 trillion) and debts issued by Fannie Mae and Freddie Mac (amounting to $200 billion) as another attempt to take the economy out of recession. It is described as an innovative way of increasing the money supply in the economy because the Federal Reserve (Fed) has already exhausted regular monetary policy tools such as interest rates.

It had ventured into unusual operations by the end of last year by buying private commercial paper, expanding loans to banks & financial institutions, making enormous loans and loan guarantees to AIG, Bear Stearns, Citigroup and Bank of America. During that time the Fed also set up a facility to buy securities backed by car, student, small business loans and mortgages. These measures were deeply criticized and raised doubts about the rationale followed by Federal Reserve. The Fed had taken these steps to expand the credit base to private sector and decrease the spread (the difference between deposit interest rates and lending interest rates) on private loans. However, the new announcement on further buying of treasuries has raised criticisms such as the risk of inflation and dependence of Fed on newly printed money. Nonetheless, Mr. Bernanke states that assuming such a risk is the right thing to do to pull the economy out of recession (a slump in GDP growth). As inflation (the increase in price levels when too much money is chasing too few goods) is currently not the problem because the economy is actually headed towards deflation (an overall decrease in price levels in the economy). The Fed also argues that the main aim of these measures is to lower the cost of private credit and the fact that it also eases the money supply is just a second thought. The rationale behind easing private credit is to instill demand for consumer and investment loans. These are expected to provide the impetus for GDP growth in the economy and bring it out of recession. The Fed needs governmental support to accomplish these goals i.e. to win back the confidence of lending institutions and consumers.

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