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Monetarism - Essay Example

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Lots of people had different ideas. For a long time the world was divided between people who believed in free markets and those who wanted the government to control everything. During this battle both of these…
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Download file to see previous pages... This affects many things in our lives such as the price of food, the wages we work for, and how much our mortgage is. Thats why these men are so important.
The Federal Reserve has taken an unprecedented amount of control and power in the wake of the Great Recession. At the time many people were unsure what to do. The current Chair of the Federal Reserve in the United States believes, along with Friedman, that the Great Depression was worsened by excessive government action—nevertheless, the government is spending a ton of money and intervening a lot in the economy in an effort to save a lot of companies that had very bad and very risky business models. Part of the problem is that companies became “too big to fail.” That means that if they were to collapse, the damage to the economy would be so terrible, the economy itself might collapse. This has been a serious problem in the United States and it is part of the reason so much money has been given to AIG, for example.
Some blame the Fed for causing the crisis in the first place by maintaining low interest rates for so long. This action resulted in an expansion in personal debt as borrowing costs were so low. The result was that people stopped saving and consumers and businesses became overleveraged. As debt rates spiralled people began to default on their interest rate payments. This in part was responsible for the crisis.
The solution to all of this, some have said, is to follow the philosophy of Keynes. This suggests that the government should fund a massive stimulus program in order to give more money to ordinary people so that they spend it and create economic growth. This idea might work in the short term and with a small stimulus, but it is too expensive in the short term. Macroeconomic policies should also be used and interest rates kept at reasonable levels. It helps to use fiscal tools such as low tax rates in order to help solve the problem. Both a small ...Download file to see next pagesRead More
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