Was the Federal Reserve successful carrying out its role as lender of last resort?Do you think the Federal Reserve successful carried out its role as lender of last resort in the wake of the...

Was the Federal Reserve successful carrying out its role as lender of last resort?

Do you think the Federal Reserve successful carried out its role as lender of last resort in the wake of the terrorist attacks on September 11, 2001? Why or why not? 

Expert Answers
enotechris eNotes educator| Certified Educator

The concept of the government as a "lender of last resort" is antithetical to an efficient economy. Why won't any of the private investors lend?  Because they know it's it a bad deal! The Fed, for purely political reasons, pretends otherwise.

If a business cannot weather the vicissitudes of the market, despite world events, its not fit to function in the world. Would the government not doing anything to "help" result in damage? Yes.  Companies would fail.  People would lose their jobs.  However, those short-term losses would be more than offset when the market reallocated that businesses' resources and created new businesses and jobs.

All the Fed did (and does) in these "last resort" cases is prolong economic agony and minimize growth.



literaturenerd eNotes educator| Certified Educator

I have to agree with the poster regarding the definition of success. There are many different things which could constitute success here, or not. First, the companies which were bailed out could consider themselves successful for being able to continue business given the loans. On the other hand, some people could consider the loans as unsuccessful. If they do continue to bail out companies, the Feds could be looking at placing the financial world in a very difficult spot. The concept of success is simply too broad.

readerofbooks eNotes educator| Certified Educator

This is a great question. I think the Fed is in a very hard place and in the long-term, I think they will do more harm. The dollar has consistently lost strength, people borrow too much, because of low interest rates, and all the bailouts do not help the deficit. In view of these things, I believe that the Fed makes decision for the short-term without thinking about the long-term consequences. To be honest, most of the world is doing the same thing.

belarafon eNotes educator| Certified Educator

I actually think the Fed did a decent job here, since trust and faith in the banking and economic system dropped after 9/11. With the central money-lending and money-generating organization of the U.S. Government saying "Hey! It's OK! We have money and we're not letting anything get in the way!" citizens were able to continue much of their daily life without worrying that their money would become worthless. This was essentially an act of faith.

accessteacher eNotes educator| Certified Educator

Difficult question to answer, as other editors have pointed out. Certainly what needs to be considered is both the initial and the long term impact of the action of the Federal Reserve. We could definitely argue that it had a beneficial impact on the American economy to begin with, though some would also say that the money it gave out in the years after 9/11 had negative long term repercussions.

vangoghfan eNotes educator| Certified Educator

I guess I would err on the side of generosity and say that the Fed handled things pretty well in the wake of 9/11.  That could have been a truly catastrophic event for the national economy. The fact that we got through it as well as we did is still somewhat surprising to me. Steps were proposed, well before the housing crash, to rein in irresponsible lending, but they were rejected.

rrteacher eNotes educator| Certified Educator

The bailouts did not take place in the aftermath of 9/11. Lowered interest rates did. One of the reasons it is difficult to discern what caused the housing bubble is that these changes in monetary policy followed changes in fiscal policy (i.e. tax cuts) before 9/11. The one lowered interest rates, the other pumped more money into the economy.

pohnpei397 eNotes educator| Certified Educator

What constitutes success?  The Fed lent a lot of money after the attacks (in 2001, of course, not 2011) and the economy did not suffer long term damage.  However, there are those who blame this lending for helping to inflate the housing bubble that did us in in 2007-8.

litteacher8 eNotes educator| Certified Educator

I do think that the Fed managed to avert disaster in some ways.  However, how much they can and should do is limited and debatable.  They do not need to get too heavily involved long-term.  It would not be good for the government or the economy.