The professor introduced the Global Financial Crisis in our Comm 101 class this week and asked us to post on pulse press who is it to blame for the crisis: the People, the bank or the government?

In class, I thought it was mainly the fault of the bank because in my opinion, they shouldn’t lend it to the people with high risks, or in other words, those with a high possibility of failing to return the money.

After going home and doing a deep research about this, I realized that it was complicated, and that neither the banks nor the Fed could evade the responsibility.

” You were right, we did it. We are very sorry. But thanks to you,we won’t do it again.” That is what Ben Bernanke, the chairman of the Federal Reserve, said on Milton Friedman’s 90th birthday. What he said was basically about the Great depression which Milton Friedman argue was caused not by stock market crash but by the poor monetary policies.

Ben Bernanke promised that he would not do this again, but in 2008, he did it again!

The transcript of the Fed’s meeting from June 24-25 2008 revealed that there was 468 mentions of inflation but nothing barely taking about the crash of the Money Multiplier. The Fed kept the interest rate constant which just increased bank’s Excess Reserves, instead the Fed should decrease the interest rate to increase liquidity.

 

Above showed the Crash in Money multiplier which lead to the Huge Financial Crisis in 2008.

Although the Fed has to pay for the wrong policy, the banks could not evade responsibilities as well. No matter how bad the policy was, the CDOs and CDS was the start of the crisis which led to a huge uncertainty and the loss of information in the market.

 

References

http://www.washingtonsblog.com/2010/03/the-fed-is-responsible-for-the-crash-in-the-money-multiplier-and-the-failure-of-the-economy-to-recover.html