Describe the new tools of monetary policy of the Fed and explain the basic reasoning of the Fed to create these new ways to deal with the recent financial crisis.

Question

Quizplus · Accepted Answer

The Answer is To prevent the worst case scenario after the onset of the financial crisis, the Fed intervened in the markets, buying all types of private securities. For example, in March 2008, the Fed was concerned that Bear Stearns would fail and that this would cause other firms who had lent money to Bear Stearns to fail, harming the whole financial system and the economy. So it bought some of Bear Stearns's assets and arranged the sale of the rest of Bear Stearns to another financial firm, JP Morgan. Similarly it bought some of the assets of AIG to prevent it from failing in September 2008. By the end of 2008 the Fed was buying mortgage-backed securities to try to reduce mortgage interest rates and thereby help stop the bust in housing markets. It bought commercial paper because few investors were buying it and the Fed was concerned that the lack of credit availability would harm the economy.
The reason that the Fed decided to lend to these institutions was similar to its reason for buying private securities: It was concerned that without these loans the firms would fail, and that the failure would ripple through the economy. These actions are also part of the Fed's credit easing policy.

Describe the New Tools of Monetary Policy of the Fed