The Federal Reserve considers transparency about the goals, conduct, and stance of monetary policy to be fundamental to the effectiveness of monetary policy. The Federal Reserve Act sets forth the goals of monetary policy, specifically "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Financial stability is an important prerequisite for achieving those goals.
In January 2009 during an interview on C-SPAN, Rep. Paul Kanjorski (D-PA) paraphrased information provided to Congress in September 2008 by Federal Reserve Chair Ben Bernanke with then-Treasury Secretary Hank Paulson.
According to Kanjorski, the Federal Reserve at about 11 AM on Thursday, September 18, 2008 detected that $550 billion had been withdrawn from money market funds in the preceding 1-2 hours. In response, the Fed started to provide liquidity to try to stem this electronic bank run. After spending $105 billion, Fed officials realized that they were unable to stop the run.
Kanjorski did not say who was behind these massive money market withdrawals. There are several central banks and some of the world's ultra-wealthy private individuals who could have started this process. Much of global financial investments are managed by computer programs set up to react quickly to unusual trends.
A single party could have started the whole process by withdrawing enough money market funds to cause other investors' programs to spring into action to withdraw their funds, leading the whole process to snowball.
They stopped further spending, temporarily closed down money market accounts, and then announced that the federal government would guarantee such accounts up to $250,000 per account as a means to halt the panic.
According to the Fed, if they had not made the moves that they did then, a total of $5.5 trillion of money market funds would likely have been withdrawn by 2 PM. If that had occurred, the entire US economy would have collapsed.
Then-US president Bush quickly called for a $700 billion bailout package that grew to $875 billion by the time Congress got through adding projects. These events and response to them created an impact on presidential elections. Currently the President Barak Obama and the executives fight the global financial crisis to avoid further economic deterioration in the USA.
The Federal Reserve has implemented new policy tools to address the global current financial crisis.
The reduction in the target federal funds rate from 5-1/4 percent to effectively zero was an extraordinarily rapid easing in the stance of monetary policy. In addition, the Federal Reserve has implemented a number of programs designed to support the liquidity of financial institutions and foster improved conditions in financial markets.
- The first set of tools, involve the provision of short-term liquidity to banks and other depository institutions and other financial institutions. Because bank funding markets are global in scope, the Federal Reserve has also approved bilateral currency swap agreements with 14 foreign central banks.
- A second set of tools involve the provision of liquidity directly to borrowers and investors in key credit markets.
- As a third set of instruments, the Federal Reserve has expanded its traditional tool of open market operations to support the functioning of credit markets through the purchase of longer-term securities for the Federal Reserve' portfolio. For example, on November 25, 2008, the Federal Reserve announced plans to purchase up to $100 billion in government-sponsored enterprise debt and up to $500 billion in agency mortgage-backed securities.
Transparency about monetary policy also helps promote the accountability of the Federal Reserve to the Congress and the public. Such accountability is especially critical when nontraditional policy tools--which are less familiar to the public than traditional policy tools--are employed.
Ernest Ionescu
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