Abstract

IN THE NINETY-SIX YEARS since its founding, the U.S. Federal Reserve (Fed) has never been so daring, aggressive, or ground-breaking in its policymaking as it has in response to the current financial crisis brought upon by the collapse of the U.S. housing market. The Fed has slashed the interest rates under its control to practically zero, provided funds more freely and lavishly than ever before to a greater range of financial institutions and players, in addition to expanding swap lines with other central banks in order to inject liquidity into U.S. dollar markets world-wide. Most extraordinarily, it came to the rescue of various companies whose bankruptcy was deemed to pose a threat to the entire financial system. Predictably, the Fed’s policy response to the crisis has generated a torrent of commentary, much of it, given the recency of the events at issue, having thus far appeared in the media as opposed to the scholarly literature. While it is hard to quantify, the majority of observers have endorsed the Fed’s actions, viewing these as the logical outcome of the central bank’s lender of last resort function and the dictum that monetary conditions must be relaxed in proportion to expectations of slower economic activity (Wolf, 2008; Evans-Pritchard, 2008). According to this conventional wisdom, the Fed’s policies have so far cushioned the U.S. and world economies from the potentially devastating impact of the financial tsunami and will eventually, especially if expansive fiscal policies are implemented, bring about recovery. Among the minority that have criticized the Fed, there are those who fault Ben Bernanke, the chairman of the Fed, for adopting a purely monetary diagnosis of the crisis and its cure, thereby marginalizing the Keynesian insight that, under dire economic conditions, fiscal policy is the only effective

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