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How Did The Federal Reserve Economists Define Moral Hazard

604 Words3 Pages

Faysal Ahmed
Economics 505
Research Project Phase Four

How do the Federal Reserve economists define moral hazard?
Page 2 has a definition of moral hazard as to how the insurance industry would the term. However, after reading the document, I believe the Federal Reserve economists define moral hazard as the rare intervention which is undertaken reluctantly in order to do what is necessary to achieve financial stability in the Markets (Rosenblum, H., DiMartino, D., Renier, J., & Alm, R., 2008).
What extraordinary actions did the Federal Reserve take in late 2008?
The bank had to pump liquidity into the economy and expand its lending beyond the commercial banking section. It was necessary to take direct action with a $85 billion bridge loan …show more content…

According to the article, the Federal Reserve believes that the market should auto correct in the long run. (This is a classical theory which dictates that long run aggregate in the marketplace will auto correct). However, when it does intervene: (Gross, 2007)
i. It dictates either the increase or decrease in the reserve requirements. ii. Sets the discount rate for borrowing to influence interest rates. iii. Use of monetary policy to keep inflation under control
The Great Depression and the Great Recession: The Impact on institutions, public policies and regulations.
The Great depression had very adverse impact on public policies and gave rise to the New Deal. The New Deal was President Roosevelt’s quest to make sure the American economy was revived and that the Federal Government should be instrumental in ending the Great Depression.
Initiatives were taken by the Roosevelt administration and Congress (History.com, 2009). Only a handful are listed below.
i. Ending prohibition ii. The Tennessee Valley Authority Act which allowed the Federal Government to build dams that controlled flooding along the Tennessee River and generated

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