The Federal Reserve of the US - Essay Example

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 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 spiraled 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 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 to help solve the problem. Both a small amount of Keynesianism and monetarism is perhaps the best solution.

Many of the great debates that happened between people like Hayek, Friedman, and Keynes, in the 20th century are once again happening as America tries to pull itself out of a terrible mess. Some people believe it was caused by a lack of regulation and some by excessive regulation. Only time will truly tell what is the best solution.