Federal Reserve and the Great Recession Research Paper

Federal Reserve and the Great Recession - Research Paper Example One of the major causes of the Great Recession was the bursting of the housing bubble. Being a regulator of the monetary system, the Federal Reserve could have seen a crisis coming. The major cause of the housing bubble bursting was that the Fed opted to expand their monetary policy; though the regulation was effectively done, this policy was a contributor to the problem. The Federal Reserve might have bowed to the pressure from the government to have the implementation of the housing policy be implemented. It happened that the dot-com crash was followed by a substantial increase in the printing press that resulted in an increase in the monetary base. Additionally, there was a great cut in the federal funds by Greenspan (from 5.6% in 2001 to 1% in 2003). These factors contributed to an increase in the housing among other investments that utilize huge amounts of capital. The Fed could have intervened at this point and develop a regulatory mechanism to prevent the situation from escala ting to the financial crisis and ultimately the Great Recession. The Federal Reserve failed to develop adequate measures that would deal with the insolvency. Two institutions at the center of the Great Recession, Lehman Brothers, and Washington Mutual became insolvent resulting in their collapse. The Fed made a miscalculated attempt to go ahead and support these institutions instead of giving them a chance to fail, the outcome would have been an increase in the amount of savings as well as investments.