Banking and Monetary Policy During Recession of 2008-09

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Why the three bankers might be considered more powerful than most countries’ leaders

The three men named by The Newsweek Magazine as the fourth, fifth, and sixth most powerful people in the world are Ben Bernanke, Jean-Claude Trichet, and Masaaki Shirakawa (Samuelson, 2008). They control institutions, which dictate the monetary policy to their countries.

Also, the three countries represented by the three men command a huge portion of the global economy. Thus, actions and decisions made by the three men, and their institutions, affect the inflation, economic growth, and unemployment rate in the world. The monetary policy of the few advanced countries affects the overall economic activity in the world. The three men can alter the monetary policy of their countries and increase or shrink other smaller economies; they are indeed powerful.

An increase in the base lending rate of the Federal Reserve, and the central banks, led by the three men leads to significant shrinkages in the world money supply. This happens because many central banks in smaller countries borrow from progressive economies to spur their economic growth. Moreover, the advanced economies hold the majority of the consumption stakes in the whole world. An alteration of the consumption levels in these advanced economies sends a clear message to other smaller economies, which follow suit by shrinking or expanding.

How during the recession of 2008–09, banks of the world seemed to unite on cue to lower interest rates worldwide

During the recession of 2008-09, banks of the world seemed to unite. Proponents of the union argued that a low-interest rate would spur economic activity and lift the world economy from the recession. Fundamentally, a decrease in the interest rates by banks lowers the cost of borrowing and prompts consumers to borrow more than they could have, previously. The extra money at the hands of consumers would fuel an increase in demand for goods and services. Consequently, the amplified demand leads to an increase in investments in production capacity. Eventually, it leads to increased employment by firms, to serve the demand.

The only viable solution to the recession of 2008-09 was to increase the level of economic activity in the world and spur global economic growth. Banks of the world realized that availing more money to their respective economies was the solution. On the other hand, the need for unity arose because an uneven lowering of interest rates would create a rutted stimulation. If there were no unity, an increase in the money supply would lead to inflation in some countries, as others would fail to produce enough goods and services to satisfy demand.

How to improve the U.S. monetary policy

The monetary policy of the United States needs to have additional checks and balances. The additions would ensure that the management of the economy is in line with the principles of the monetarism theory. Distribution of power, currently wielded in the Federal Reserve, would dilute its ability to hold the overall economy at ransom. In return, the management of the monetary policy would be more transparent. An openly managed monetary policy would make it easier for the government and other policymakers to predict and circumvent recessions (Friedman & Schwartz, 1971).

The monetary policy should remain separate from populist intentions that gratify the public at the expense of long-term economic stability or growth. However, the monetary policy should not become a replacement for fiscal policy, which extremely follows popular opinions of the elected government. Interest rates have a limit for reduction. Other measures within the fiscal policy, like taxation, allow governments to tame unemployment without hurting security markets and interest rates. The monetary policy has to work in tandem with other economic management policies of the government (Timberlake, 1993).

References

Friedman, M., & Schwartz, A. J. (1971). A monetary history of the United States, 1867–1960. Princeton: Princeton University Press.

Samuelson, R. J. (2008). The global elite: Economic Triumvirate. Web.

Timberlake, R. H. (1993). Monetary policy in the United States: An intellectual and institutional history. Chicago: University of Chicago Press.

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Banking and Monetary Policy During Recession of 2008-09

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