Central Banks and Financial Markets

Central Banks and Financial Markets

The Declining Power of US Monetary Policy

Hasan Cömert

In the wake of the financial crisis of 2008, there has been increasing debate over the appropriate role of central banks in mitigating economic disaster. This timely volume combines detailed historical and econometric analyses to explore the profound changes that occurred within the US financial system from the 1980s to the present, and shows how these changes have affected the US economy.

Chapter 5: Did the Fed create the US financial crisis of 2008?

Hasan Cömert

Subjects: economics and finance, financial economics and regulation


The current US financial crisis has been the center of intense debate among economists. There are several competing explanations of the origin of the crisis. Some scholars have focused on international factors behind the current crisis. According to them, global imbalances were the main root of the current developments (Bernanke 2005, 2007b, Greenspan 2009 and 2010b). In this sense, they argue that increasing financial flows to the US economy increased the availability of liquidity which, in turn, simultaneously put pressure on market interest rates (Warnock and Warnock 2009) and increased the availability of credit preparing the ground for the current crisis (Greenspan 2010a, 2010b). Others gave precedence to domestic factors. A group of scholars within this camp has blamed the Fed for creating the current US financial crisis. On the one hand, some of those scholars argue that the Fed neglected its regulatory and supervisory role and ignored several malpractices in financial markets due to the firm belief of the majority of its governors and the chairman Alan Greenspan about the capacity of financial markets in hedging risk through creating new financial instruments (Levine 2010).

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