Greenspan's Conundrum and Bernanke's Nightmare

Abstract

At what point in a recession should the Fed institute an arguably risky expansionary monetary policy -- namely, aggressive Fed purchasing of long-term Treasury bonds? Federal Reserve Board Chairman Ben Bernanke faced this question in 2009. Suitable for both core and elective MBA courses in global financial markets, this case examines the risks associated with a policy so perilously close to monetizing the budget deficit. Students consider the factors behind the current and prospective levels of U.S. long-term interest rates from Bernanke’s perspective. Already, the Federal Open Market Committee had lowered the federal funds rate from 5.25% in 2007 to roughly 0%; it had also begun an almost unfathomable effort to free up frozen credit markets and easing credit to loosen monetary conditions even further.