Boe and Fed

An Expanded Role of The Federal Reserve and Bank of England During the 2008 Financial Crisis

The worldwide economic crisis that became manifest in 2007 and 2008 resulted from many factors involving the government, the financial services industry, and society as a whole. This paper examines how the monetary policy decisions of the FED and BoE during the period from mid-1999 through the end of 2008 served as the fundamental spark that led to the economic crisis. As this paper details, the Central Banks’ focus on controlling inflation and inflationary expectations led to monetary policy decisions that created wild gyrations in interest rates, the spike in housing prices, and eventually the crisis in the financial services industry. The paper concludes with recommendations to help ensure that these same monetary policy mistakes do not occur in the future.

Introduction with a briefly the cause of 2007 crisis

The biggest financial crisis began in the summer of 2007, and was rooted in the U.S.A, giving start to a period of remarkable macroeconomic stability. This period we can describe by an easy lending period with low interest rates and a stable growth in the US and Europe after 2001. Amalgamated with low rates of inflation, which were helped by the speedy growth of cheap imports from China and other Asian countries. With these conditions and a reduction of risk premia, the market was encouraged to assume high leverage based in the securization of the loans. These included CDOs (Collateralized Debt Obligations) and a spectrum of ABS (Asset Backed Securities). There was also a rapid growth of CDS (Credit Default Swaps), offering protection from purchasing risk assets.

The model of lending was replaced from the ‘’originated and distribute model’’ to a new model implicated in a chain of participants from the original lender to the final investor. The implicit problem in this case was the investor had less information regarding the quality of loans from...