Analysis Of The Fed’s Financial Rescue Policies Towards The Subprime Mortgage Crisis

The western countries’macro-economic adjustment functions are undertaken by their own central bank. Consequently, during the subprime mortgage crisis in2007, the Fed played an important role. In the crisis, the Fed, the world central bank of central banks, demonstrated the capacity of handling the crisis and led to the good effects, which influenced the whole world economy. From this angle, the Fed shoulders economical duty not only for adjusting domestic economy but also guiding the whole world economy. From actual processing, the Fed, adhering to pragmatism and the steady principle, made a practical attempt on the liquidity facility--the scope of injection and objects of funding were greatly expanded, meanwhile interest rates was cut several times by a large margin. Through these measures, the market confidence was boosted and the support on the real economy was enhanced. These radical interventions in the market were unprecedented. However, it was the traditional and creative measures that helped the USA go through the2007complex and serious situation, and successfully avoid the center of the storm crisis.This article mainly introduces the thesis in the preface to the first chapter of the study on the background, significance and relative literature review, combing domestic and foreign scholars’studies on the financial aid policies. In conclusion, many scholars have affirmed the various financial measures taken by the Fed, on the other hand they also have doubted that these could have a negative impact. Their researches are comprehensive and meaningful.Chapter Ⅱ rationalizes the concept and theoretical basis of the financial rescue policy, including government intervention theory, monetary policy theory and the theory of financial development, etc.Chapter III analyses the domestic and international background of the implementation of the Fed’s financial rescue policies and, according to the three stages of the implementation (August2007to October, in November2007to February2008, March2008-present), summarizes the three main types of the policies. One is to lower the federal funds rate and discount rate. The second is the quantitative easing monetary policy. Through the direct purchase of government bonds, corporate bonds and mortgage-backed bonds and other securities, the Federal Reserve injects liquidity to U.S. financial markets. The third is a variety of innovative credit instruments, including innovation policy instruments for deposit-taking financial institutions.Chapter IV discusses the Fed’s traditional monetary policy towards the subprime mortgage crisis and at the same time focuses on the innovative financial policies towards the crisis through a series of financial instruments. These policies include:①The Fed launched a financing tool of innovation for depository institutions---Term Action Facility;②For primary dealers and holders of securities and issuers, the Fed presented the following two policy instruments:Primary Dealer Credit Facility; Term Securities Lending Facility;③The following four policy instruments for the money market:Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; Commercial Paper Funding Facility; Money Market Investor Funding Facility; Term Asset-backed Securities Loan Facility. In addition, the Fed began to develop international collaboration currency swap operations, and strengthen international coordination and cooperation.Chapter V, on the basis of analyzing the basic characteristics of the Fed’s financial rescue policies, analyzes the effectiveness of the traditional and innovative financial rescue policies towards the crisis separately, but also stresses the defects of the financial policy implementation.Chapter VI elaborates that the Fed’s policies enlighten the Chinese financial reform, the financial innovation and the financial supervision and management. And the crisis and the policy idea have the strong enlightenment significance to our country monetary policy mechanism.Since the U.S.A has always considered itself as a king in economy and financial markets, coupled with the unique U.S. dollar quotation system, the U.S. dollar currency regime dominated by the U.S.A, and the financial scale, its risk control capacity is far greater than other countries. And consequently, at the arrival of the crisis it took a large advantage. Relatively speaking, the combat power of the quantity-based economy in developing countries is far less than that of quality-oriented economy in developed countries. As for Chinese economic market that is normally intervened, the risk-resisting ability is weak. The macroeconomic policy of China’s financial sector has been the most important starting point of the regulation of the market, which keeps the China’s economy relatively stable and conservative. However, with the deepening and development of world economic integration, the impact of the world economy on China’s economy will gradually increase. The coping mechanisms of the national finance ministries and central banks will be severely tested, and the central bank will become the main body of China’s handling financial crises.For China, the Fed’s rescue policies also have a lot to think and learn. First, we have to take the right steps at the right time to rescue the right market. The choices of the rescue opportunities, targets, and measures is extremely important. The right choices will absolutely lead to the good effects. Second, crisis rescue has to be creative, suits measures to local conditions, and creates various financial rescue facilities, which will not be restricted by the current conditions and policies, such as expand crisis rescue scope, not only to rescue commercial banks but also to aid investment banks, securities companies, insurance companies and other financial market participants appropriately, when necessary. Third, attach the importance to the monitoring of the financial market risks, maintain a sense of crisis, guard against moral hazard, and adjust the focus promptly and effectively according to the changes in the financial development. Only by maintaining the trust and confidence of financial markets, will the normal functioning of the market be maintained.