2008 Financial Crisis and US Monetary Policy

The global economic crunch has had a considerable impact on policy development and implementation. It has affected economic stability previously enjoyed by numerous states. Economists are some of the crucial stakeholders involved in the policy development. Observably, 1980-2007 was characterized by a stable global economy (Bonner, Addison & William, 11). Notably, this period was generally characterized by balanced GDP growth, ample employment, and diffident inflation rates. This also marks the period when most developed states wheeled themselves into states of economic supremacy. It is evident that countries such as the US boomed economically during this time. Perhaps, it signifies the time when the US dollar significantly remained a powerful global currency reserve unit.

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The impact of this economic stability (during the specified period) on policy makers cannot be underestimated. The financial bubbles have been noted in diverse cases. Particularly, they transpire in cases where prices increase faster relative to other variables. Furthermore, this situation attracts more ventures, causing acceleration in the price increase rates. The bubble phenomenon offers hard periods for policy makers as well as fiscal strategists globally (Shiller, 8).

This is basically because the outcome remains very hard to predict. As observed in the dot com case of 1990s, it is notable that these bubbles have the potential to burst. On the other hand, the situations have the capacity to subside more gradually. However, the general fact is that they have been increasingly prevalent within world economies. Particularly, this trend has been obviously depicted within the previous few decades.

Policy makers have hardly managed to mitigate the situation (Wiedemer, Robert & Cindy, 21). There are several repeated cases where bubbles have been noted. Lack effective policies to help curb the trend are notable. The situation is critical well considered decisively. This pitfall has been noticed even within the present century. Therefore, it can be concluded that the policy makers have failed to draw critical lessons from the bubbles. Additionally, they have not been able to mitigate the tumultuous economic impacts that the bubbles have produced. Economists argue that in order to effectively manage a bubble, policy makers and other stakeholders must perform critical roles. For instance, they must be able to recognize and tackle the principle elements of a bubble formation. This is a basic role that the policy makers have potentially failed to undertake.

The occurrences in the bubbles such as the great depression of 1930s and Japan’s bubbles (in 1980) offer some considerable lessons with regard to economic crunch (Bonner, Addison & William, 45). Basically, it is notable that the policymakers had a higher stake of curbing the 1990’s bubbles and those in the 21 century. However, this would only be applicable if they adequately studied the anatomy of the earlier bubbles. It is noteworthy that policymakers remained complacent concerning the possible control of the two major economic “bubbles” realized during the 1990s as well as the formative years of this 21st century. The post 1990’s internet bubble and other present global concerns encompassing house prices have not been effectively captured by policy makers.

Most policy makers have misled central banks in the past. The failure of Federal Reserve policymakers is due to many reasons. Most scholars have reiterated that the knowledge foundation on which most central banks operate is futile. This is because the knowledge depends on faulty thinking (Wiedemer, Robert & Cindy, 26). The present global monetary instabilities have also destabilized the policy makers’ forecast competencies.

The persistent application of this flawed thinking and knowledge by most policy makers has contributed to the eminent fail. This has been particularly noted within the central banking system. Due to misconstrued knowledge and skills, most policy makers have narrowly established guidelines with notable defects. For instance, narrowly distinct inflation targets remain defective. Coupled with the history of establishing an extensive inflationary resource bubbles, such policies have propagated control inefficiencies.

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Federal Reserve policy makers have frequently believed on the proposition that steady rate of inflation is indicative of a thriving economy (Bonner, Addison & William, 76). This is a fallacious notion having several false premises. It might be attributed to the complacency of the policy makers during the wide economic expansion that was notable from 1980s to 2007. Political interference has also been a basic contributor to the failure of the Federal Reserve policy makers to contain the two bubbles.

Involvement of the legislators as well as other lobby groups in the process of fiscal policy formulation has particularly been detrimental. This is because these are interest groups with diverse opinions, which are likely to debate, cause delays and twist empirical reasoning in policy making. Long term and strategic policy-making is affected by crisis management through several ways. Effective crisis management approaches help in the sustenance of long-term strategic polices. Whenever disasters occur, they enable critical procedures for mitigation and reduction of economic impacts.

The concept of crisis management might be applicable in bubble cases (Wiedemer, Robert & Cindy, 52). Long term strategic policy formulation must consider risk management in order to ensure its sustainability. Therefore, it is apparent that there is a mutual co-existence or relationship in effects between crisis management and long term strategic policy making. Indeed, there are critical lessons to be drawn from the Vo1cker years. The U.S. government’s strained nationalization of certain banks appeared to have potentially reduced the global debt crisis.

However, there was a projected possible fresh occurrence of bank-stock drops as well as deposit losses. The critical observations made by Paul Vo1cker during this time still soundly resonate within any economic policy formulation (Shiller, 44). During this time, the chairman to the Federal Reserve indicated that the Continental bailout enforced by US could turn out as a critical lesson to several other banks within US.

Initially, Vo1cker acknowledged potential progresses notable within Mexico, Brazil, Venezuela (Wiedemer, Robert & Cindy, 145). He further reiterated that the good debtors, which rebuffed, had to be recompensed through long-term streamlining of their outside debt. However, Vo1cker insisted on the importance of U.S. banks making critical adjustments. Vo1cker argued that the Continental’s failure was to increase deposits at any rate that was applicable.

In his sentiments, he fiercely opposed the involvement of the congress in determining the roles of the commercial banks. The congress’ resentment of the government bail out of the continental was obvious. This indicated the devastating role that political interference can have on effective policies within an economy. The congressional view that Vo1cker’s objective was to divide and rule Third World debtors was widely spread. After all these debate, it was noted that long-term renegotiations apparently never transforms any bank’s loan principal valuation. This is a critical consideration in numerous contexts.

The challenge that Vo1cker never addressed was the manner in which Mexico and other states would sustain servicing the heavy loan and interests (Bonner, Addison & William, 112). Therefore, the major question was whether banks were to absorb the minimization of their revenues. There is a crucial lesson learnt in this case about the negative impacts of careless policy approaches. This applies both in the global and domestic economy. Increased money circulation increases the rates of employment within an economy. Consequently, there is an elevated output within the workforce. This increases the aggregate output within the economy.

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The prices as well as inflation rates increase at a faster rate due to the presence of a lot of liquid money within the circulation. However, it should be noted that this situation is deceptive. Therefore, in such scenarios, policy makers have to conduct critical research and formulate policies that seek to balance the production factors and liquid cash flows within an economy. The lending rates of the central bank to all commercial banks often justify an inflated economy. In order to survive hard economic periods, the roles of the central banks must be reviewed and strengthened constantly (Shiller, 98).

This is because central banks are the potential regulators of the entire economy. Therefore, policies that support and reinforce their roles must be formulated. The historical experiences with the global economy should teach us to value the significance of crisis management and assessments. The policy directives aimed at controlling bubbles and other economic misfortunes must be proactive and reactive. All these directives are only possible through the practice of effective policy formulation and implementation procedures.

Works Cited

Bonner, William, Addison Wiggin, and William Bonner. The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble. Hoboken, NJ: Wiley, 2009. Print.

Shiller, Robert. The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It. Princeton, NJ: Princeton University Press, 2008. Print.

Wiedemer, John, Robert Wiedemer, and Cindy Spitzer. America’s Bubble Economy: How to Profit When It Pops. Hoboken, NJ: John Wiley & Sons, Inc., 2006. Print.

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