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98 IRET Policy Bulletin 1 (2011)

handle is hein.taxfoundation/iretpbul0057 and id is 1 raw text is: ~July 29, 2011 No. 98 MONETARY POLICY-CONVENTIONAL AND UNCONVENTIONAL; TAMING THE FINANCIAL CRISIS Induced by the Great Recession of 2007-09, and especially by the 2008 financial crisis, the Federal Reserve (Fed) undertook unconventional policies that probably saved the financial system from meltdown, but may have effected far-reaching consequences for years ahead. Quite apart from fulfilling its mandates to promote economic growth and maintain stable prices, the Fed made loans to specific financial institutions, accepted hitherto ineligible collateral, and purchased bonds that vastly enlarged its balance sheet and created unprecedented levels of excess bank reserves. How these events came to pass and their possible consequences-including potential inflation and loss of Federal Reserve independence-are described in this essay. Introduction To review and appraise economic policy making at any time is a challenge; but the current national and global context is one of bewildering complexity. Not only is the nation in the aftermath of an economic downturn deservedly called the Great Chart 1 Recession, accompanied by an Actual and Potential Real GDP unprecedented financial crisis, one Billions of chain-weighted 2005 dollars of our most important trading 15000 Potential partners, Japan, is slowly recovering 13000 . from a devastating earthquake and Actual tsunami. Moreover, this year our 100 11000 nation has had to cope with unusually violent spring storms and 9000 9 0 0 0 . . . . . . .. .. . . . . . . .. . . . . . . . . ... ... .. .. .. . . . .. ..7 I I I I I ... ... .. I .. .. .. . resulting floods. Europe's economy 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 endured the recession and financial Source: Federal Reserve Bank of St. Louis, Monetary Trends Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1710 Rhode Island Avenue, N.W., 11th Floor • Washington, D.C. 20036 Taxation (202) 463-1400 • Fax (202) 463-6199 • Internet www.iret.org

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