Reference no: EM133221959
Operations Management
The Federal Reserve doesn't coordinate its monetary policy choices with any other branch of government, but it is a known fact that expansionary monetary policy in the wake of an asset bubble burst is much less effective, due to the reluctance of banks to lend. Under those conditions, the burden of stimulating the economy falls more on the shoulders of fiscal policy (conducted by the executive and legislative branches of government) under those circumstances, but in fact, after the Great Recession, the source of expansionary policy came more from the Fed, when in theory, the federal government probably needed to take a more active role in maintaining stimulus. Granted, having a budget deficit meant that fiscal policy was expansionary, but the fact of a declining budget deficit year after year meant that fiscal policy was provided less and less stimulus at a time when aggregate demand was, and remained, weak. The economy even experienced a brief bout of deflation, which can be a more dangerous phenomenon for an economy than inflation.
We tend to think that the Fed and the federal government will work together to boost the economy when needed, but my point in this essay is that in fact, the federal government was effectively working at cross-purposes to the Fed. The burden of stimulating the economy fell to the Fed, which tried to pursue extraordinary measures to loosen monetary conditions, given that the Federal funds rate target could not be lowered below zero.
However, the Fed's action to pay interest on excess reserves was an effort to limit bank lending and over the last several years, expansionary monetary policy because less and less effective. So presently, I am of the opinion that economic policy mistakes were made during and after the Great Recession, just as they were during the Great Depression. And I am sorry to say that, because I had hoped that we had learned something from the Great Depression.
But, economics is an art as well as a science, and when political considerations are mixed in as well, it gets very tricky, to put it in plain language!