Chapter 31 - Financial crises, panics, and unconventional monetary policy. In this chapter you will: Explain why financial crises are dangerous and why most economists see a role for the central bank as a lender of last resort, explain the role of leverage and herding in financial bubbles and how central bank policy can contribute to a financial bubble, explain why regulating the financial sector and preventing financial crises is so difficult. | We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. ―[an open letter from a number of economists to the chairmen of the Fed] Financial Crises, Panics, and Unconventional Monetary Policy Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Explain why financial crises are dangerous and why most economists see a role for the central bank as a lender of last resort Explain the role of leverage and herding in financial bubbles and how central bank policy can contribute to a financial bubble Explain why regulating the financial sector and preventing financial crises is so difficult Discuss monetary policy in the post financial crisis period 2 Financial Crises, Panics, and Unconventional Monetary Policy In 2008, the world financial system nearly stopped working Banks were on the verge of collapse The stock market dropped precipitously The . economy fell into a serious recession Central banks and governments across the world took extraordinary steps to try and calm the crisis Central banks have been running unconventional monetary policy strategies to prevent problems 3 Financial Crises, Panics, and Unconventional Monetary Policy A financial sector collapse would bring all other sectors crashing down To help prevent such a catastrophe, the Fed serves as a lender of last resort All the other sectors need the financial sector to do business The fear in October 2008 was that the financial crisis on Wall Street would spread from Wall Street (the financial sector) to Main Street (the real sector), creating not a recession but a depression 4 Anatomy of a Financial Crisis Inflation of a bubble - unsustainable rapidly rising prices of some type of asset The bubble bursts, causing a recession The effects of the bursting bubble threaten the entire financial | We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. ―[an open letter from a number of economists to the chairmen of the Fed] Financial Crises, Panics, and Unconventional Monetary Policy Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Explain why financial crises are dangerous and why most economists see a role for the central bank as a lender of last resort Explain the role of leverage and herding in financial bubbles and how central bank policy can contribute to a financial bubble Explain why regulating the financial sector and preventing financial crises is so difficult Discuss monetary policy in the post financial crisis period 2 Financial Crises, Panics, and Unconventional Monetary Policy In 2008, the world financial system nearly stopped working Banks .
