Econ Assignment Example | Topics and Well Written Essays - 750 words

Econ - Assignment Example Additionally, with a gold standard, the central bank could not apply monetary policy in order to stabilize the economy. More to this, the central bank could not raise the interest rates during inflation and lower them during recession, to stabilize the economy. There was a great deal of disagreements between the modern day Main Street and Wall Street over the central bank representation. There was a feeling among those in the Main Street, that the central bank would not be representative of the whole country, and would thus be a preserve of the moneyed few in New York and Philadelphia. For that reason, both the first and second attempts of creating a central bank failed. Thus, to address these failures, Woodrow Wilson advocated for the creation of 12 Federal Reserve banks located at major cities in the country, making the country end up with 12 regional banks (27). Paul Volcker’s method of fighting inflation in the 1970s involved the introduction of high interest rates, to slow the economy and fight inflation (46). According to him, to break the inflation cycle, then a credible and disciplined monetary policy had to be put in place. With such introduction of a credible monetary policy, the inflation rate fell significantly to 3-4%. The failures in regulations addressed in this lecture include the banks and other financial institutions failing to monitor and manage the risks they were taking under the issuance of house mortgages. Another failure in regulations was the dependency of the firms on short tern funding, such as the commercial paper. There were failures in regulations including supervision, such as the consumer protection. The stability of the financial system as a whole was not granted adequate attention. Prior to the crisis, the quality home loans were financed through the packaging of exotic and subprime mortgages into securities, by the financial institutions. Many of these securities were sold to investors,