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The Federal Reserve System, commonly known as the Fed, is often accused of being unable to prevent a financial crisis that started in 2008. While having wide powers in studying and regulating the banking sector, the institution could not effectively manage the industry to prevent the economic downfall. The issues within the system combined with the inability to effectively regulate banks led to economic catastrophe. Instead of focusing on the ways that could potentially serve as a catalysator for economic growth, Fed issued policies that were targeted at creating a short-term effect, while in the longer perspective they could cause governmental actions of increasing taxes and expenditures.
Origins of the Issue
Fed is a grand governmental structure that enjoys having a large amount of independence. Before the crisis of 2008, the agency was not controlled by audit measures targeted at determining the purposes and sums of governmental expenditures. Moreover, the Fed had unlimited access to information regarding the statistics from all the country’s financial institutions. However, there were certain obstacles for it to create strategies that would be pushing others to action.
First of all, the Fed is only partially an independent structure. The most serious decisions that will affect the whole nation have to pass the Senate and the President. Besides, the system is represented by professionals who have different points of view. This issue makes the process of decision-making rather long. Moreover, there is an opinion that the structure itself represents the interests of the government workers rather than ordinary citizens. It is easy to share a perception that the Fed acts only after receiving orders from politicians who have their interests in the financial industry.
Secondly, Western civilization is obsessed with the idea of the free market. Many people believe that having the government control the financial flows on a high level serves as a base for canceling the fundamental civil rights and ignoring the rules of capitalism. However, a free market is a utopia, and the economy is always controlled by the government at some level to ensure that all cash flow processes are fair and do not harm citizens in any way. This fact solely did not let the Fed act on its behalf during the financial crisis.
Finally, it is claimed that the agency knew about the disturbing tendency in the banking sector. Nevertheless, the Board of Governors did not pay attention to it and perceived all the information as the signs of a slight decrease in the industry. Such opinion was mostly supported by experience. However, it is difficult to say whether the ability to see and to properly evaluate the bubble in the housing loan sector could prevent the system from falling.
Although regulating banks is one of the primary functions of the Fed, it is not an easy task. There are several reasons why it is hard to control this industry. Most of them are associated with the inability to effectively measure the performance of each bank, as well as keeping the balance in all the fields that banking intersects with.
On the one hand, the Fed has to guarantee that they will lend finances to brokers. However, it does not have the power to evaluate whether that side has an effective management system and uses all sources to save the situation. Another issue associated with the Fed’s lack of independent decision-making is that it cannot opt for such measures as resolution tools. Special resolution regimes that could potentially force banks to act in a particular way are not an option in the country who wishes to maintain an image of having a free market.
On the other hand, the banking sector is connected to almost all other fields in the country. Any interference could potentially break the fair balance in this system, with the economy of a particular industry plummeting. For instance, regulating banks by ordering them to raise the loan rates and requirements for people wishing to start a small business will affect the wealth state of the whole nation. Failure to create a middle class in the society will lead to the vast difference between the rich and the poor. Besides, many people will not be able to afford housing, education, and medical care. Thus, interfering in the banking sector may lead to serious consequences that could worsen the situation even further.
Fed’s Role in Reforming Economy
Fed issued several policies as a reaction to the crisis of 2008. They were drafted to boost the economy by improving buyer behavior and stimulating governmental purchases. However, this solution did not have a lasting effect on the economy. The measures good as a temporary decision, yet many of them seemed to have an adverse effect in the long run.
For instance, one of the measures was the issuing of the American Recovery and Reinvestment Act of 2009. While it had several points, one of its most important elements included the strategy for increasing income that people could dispose of. This measure was targeted at stimulating consumption and rebooting the economy through it. A part of this step had the issuing of checks and reviewing the tax policies as its base. However, the consumption rates did not increase much, while issuing money could lead to a further increase in the debt.
Other policies also aimed to regulate financial institutions from across the country. The Dodd-Frank Act, for example, became the biggest change in financial policies since the Great Depression era. It was drafted to control such markets as the currency exchange and the precious metals trade. The Act also regulated the processes of filing bankrupt by financial companies that made up a national system. The overall idea of the document was to increase control over the country’s financial sector and ensure the economic stability of the citizens. Nevertheless, some experts claimed that the Dodd-Frank Act became a financial failure. Moreover, some of the other governmental efforts like cutting expenditures on important projects caused investors to panic and withdraw their funds.
Although the Federal Reserve system has means to evaluate the banking sector, it did not perform effectively in 2008 when the economic crisis hit the country. Its lack of control and formal power combined with the inability to evaluate whether the performance of certain banks was efficient or not caused the government to make rush decisions on the spot instead of planning improvement solutions. While some policies issued by the Fed after 2008 contributed to the recovery of the country’s economy, the overall result can be evaluated as adverse as it further deepened such issues as the federal debt, inflations, unemployment, and financial insecurity that showed itself in the following years.