Impact of Bank and Federal Behavior on Money Supply Growth, Analysis

This essay delves into the factors influencing money supply growth, focusing on the behavior of banks and the Federal Reserve. It examines the role of the Federal Reserve Bank of St. Louis in shaping monetary policies, especially during the 2007-08 global financial crisis. The essay explores how the Fed's actions, including interest rate adjustments and asset purchases, impact money supply, inflation, and economic cycles. It analyzes the pre-crisis environment, the Fed's responses during and after the crisis, and the effects on unemployment and economic recovery. The essay also discusses the impact of the global financial crisis on nations and their financial environments. The analysis considers various measures of money supply (M0 to M4) and the challenges in controlling it. The essay highlights the cyclical nature of bank behavior and its influence on money demand and supply, with a focus on how government and central bank policies affect economic stability and growth. The essay also discusses the impacts of global financial crisis over the nations in terms of making the inadequate financial environment. Therefore, the impacts of such crisis has incurred the huge economic drawback and there has been drastic changes into the long terms and short terms debts of nations.

Discuss How Bank Behaviour and Federal Behaviour
May have Caused Money Supply Growth?

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Discussing how Federal bank behaviour may cause money supply growth to be pro cyclical.. 1
Before crisis............................................................................................................................3
Post impacts of global financial crisis....................................................................................5
Interpretation of graph.................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
In the economies terms money supply or the supply of money is defined to as how much
money would be into the circulation or is existing within a country during a particular time
period. Both liquid money and money which is in form of demand deposits that are into the bank
deposits are to be included into this. So in this current essay we would be discussing about what
is the effect of recessions pre and post period on this money supply and how does the behaviour
of Federal bank is causing all these things. Under this we would also be including the
interpretation of the calculation which are to be performed using the database of Federal bank on
various aspects of it.
MAIN BODY
Discussing how Federal bank behaviour may cause money supply growth to be pro cyclical.
Federal Reserve Bank of St. Louis is the central bank of US which is making all the rules
and policies regarding to that of banking and financial sector of USA. This bank played a very
important role at the time of recession period of 2007-08 at the time when almost all the
economies of world was shocked with global financial crisis. They are indulge into the practice
of making rules and policies that are to be affected whole economy and its financial systems are
to be impacted. All the important things or phenomenon of the country like the money supply,
inflation rate, currency rates, employment, demand and the business cycle would have been
affected by policies which are to be made by the bank. In the year 2007-08 global financial crisis
hit the most important and biggest economies of the world that cause mainly due to sub-prime
mortgage markets of USA and then the collapse of Lehman Brothers in 2008 (The Fed and the
2008 Financial Crisis, 2018). The global rate of inflation in 2008 was about 6.4% more than in
2007 which is recorded to as the highest of this decade.
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This was controlled only after the strong policies which government and national banks
of various countries made, there was greater changes in the supply of money which is monitored
by both private and public sectors as this would surely be affecting exchange rate, business cycle
and price level with economy. Both the supply of money and price level are having direct
relationship with each other resulting in either recessions or boom within the economy this is
known to as quantity theory of money. The only source of money supply into the country is
regarded to as the central bank of that economy which is the regulator and introducer of money
and its flow in the economy (Staveley-O'Carroll, 2018). This phenomenon is having some major
components that are categorised into parts:
 M0- which is the sum total of all currency including the coins into country over time
period Federal reserve notes+US Notes+coins.
 MB- this is the total amount of physical currency and the Federal reserve deposits that is
only the deposits of bank with the central bank + M0.
 M1- which could be defined to as total amount of M0 plus the other liquid money that are
demand deposits, cheques in economy and travellers cheques.
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Illustration 1: GDP growth for 2008-2010
[Source: Staveley-O'Carroll, 2018]

 M2- this is M1+ mutual funds, money market accounts and saving bank accounts+ the
certificate of deposits below $10000.
 M3- M2+ cash deposits+repurchase agreements+euro-dollars.
 M4- M3+commercial papers.
It was noted that there is no single or clear measure of money supply which could be
looked up by the Federal bank and this could be corrected in one go this requires very strong and
important steps to be taken by central bank and government (The Fed’s Role in International
Crises, 2018). It took much time to recover form global economic crisis for the whole world
even the big economies were not been able to cope up with the crisis. So after certain time there
was stronger yet the uneven global recovery of other economies which included the strength and
increase in GDP of world from 2% to 3% in 2013.
Before crisis
Before the economic crisis of 2007 the role and responsibility of Federal Reserve or Fed
was increased and highlighted and the focus was of their role was increased during the time of
2007-09. This expanded responsibility of bank was highly due to the global crisis as they were
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Illustration 2: Fed: Key dates
[Source: Dua and Kapur, 2018]

the one who was setting economic policy for the country (Lee and Werner, 2018). This role
would be including or reflecting many important factors like that of financial market and
institution which were on urge to grow. All what happened during before and after the financial
crisis was majorly blamed to Fed as it is the major authority but apart from this they also
included other regulatory bodies like that of US congress was one of them. Yet Federal bank
emerged as the only regulator who performed the task of stabiliser of the financial sector crisis
(Dua and Kapur, 2018). As it was noted that bank had already given the warning before the
actual crisis occurred that there is something which is wrong and would be hitting the economy
soon especially in the residential mortgage markets. Majorly the mortgage brokers and banks
were highly unregulated by the bank which was fully banned by the Commodity Future
Modernization Act of 2000 (CFMA) so this was not the fault of Fed. However, they were blamed
for the low interest rate policy in 2002-2004 and then they tightened it in 2004 at the time when
they actually predicted the up coming loss or crisis. This was the time when USA was trying to
recover from the unemployment phrase in 2001 and then GDP for the year 2001-2003 was
increased to only 1.9% which was a matter of worry.
During the same time the mortgage rate was high form 0.6-1.2% and short term interest
rates was about 1-2% both these were capable enough to control the invitation of housing bubble.
The behaviour of bank would be important factor which is determining the flow of money and
that of credit creation as they are of cyclical nature (Farmer, 2018). The amount of money
demand in the economy should always the equal to the amount of money supplied over that time
period and both these phenomena are into the control of central bank of country. Money
multiplier is also under the same consideration which is called to as that feature is analysing how
much money would a single amount of money would be making. As they already having idea
about this crisis is going to occur in coming year so they employed large number of tools and
techniques so that they could lower down the effect of recessions over the economy. They
included traditional monetary policy which and particular range of unconventional measures.
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At the time of financial crisis they included the tools like that of cut in interest rates, large
scale asset purchase, targeted helping to financial institutions. But the efforts of Federal bank
made no certain or important changes in the unemployment rate with USA even years after crisis
was sort out. On the onset of the crisis which was in the early 2007 they began using traditional
tool that of monetary policy that of lowering down interest rate which as done to respond to
increasing unemployment (Gabrieli, Pilbeam and Wang, 2018). As the interest rate would be cut
down this would be resulting into people taking more loan from bank and increasing the credit
facility into economy. Yet after certain time this would be leading to higher spending of people
and then inflation could rise up. Then Federal bank started slowly to lower down the interest rate
causing the threat to inflation within economy as the price of agricultural and that of energy
products were increased this led to stagnation in the process of rate cut. This was also made that
the fall of Lehman Brothers effected all the other banks in USA as they pay for the failure in
extreme costly way (The Supply of Money – bank Behaviour and the Implications for monetary
analysis, 2018). Federal bank laid down the stress on Congress to pass bill which could be
regarded to as important instrument to come out from that situation which was called to as
Troubled Asset Relief Program (TARP). Thus giving the chance to Goldman Sachs and Morgan
Stanley to the access to cheap overnight lending.
Post impacts of global financial crisis
Global financial crisis has impacted over the nations in terms of making the inadequate
financial environment. Therefore, the impacts of such crisis has incurred the huge economic
drawback and there has been drastic changes into the long terms and short terms debts of nations.
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Illustration 3: Fed's Century US
[Source:Gabrieli, Pilbeam and Wang, 2018]

In relation with the negative impacts of the financial crisis which has affected the business and
operations of the small and medium sized organisations. Similarly, it has invited inflation,
recession and unemployment in the economies which has affected the GDP ratios. Therefore, the
per capita income has been reduces due to improper financial controls. It has affected the global
liquidity which will be helpful in terms of issuing the long terms bonds. Policies and tends to
make the stabilities in the policies (Dhavale and Sarkis, 2018). Financial crisis took place as per
improper management of economic operations. The excessive amount of sub prime loans had
facilitated to the consumers at lower returns. Moreover, the banks reduces their rates as to meet
the competition in the economy as well as in motive to take maximum earning. Thus, which has
impacted over invites this crisis (Bernanke, 2017).
During the crisis, there are various negative changes incurred in the national economies
on which the negative fall of GDP rates was the main obstacle. It impacted as on increment in
level of imports. Thus, the currency rate is also very week for the nation so to purchase the
necessary resources such as petroleum products, medicines and relevant resources on which one
nation has to depend over other nation. Therefore, these are the impacts which has had impacted
over making the inappropriate changes into operations. The policy maker such as federal banks
which has argued that the developing economies must sustain their exchange rates for the
sufficient growth of economy (Tang, Xu and Zhang, 2017). Therefore, they proposed the idea
that banks must keep a constant rate which will be helpful in balancing the economy again as
well as reduce the impacts of crisis the rate need not be too high as the consumers will reduce
their confidence level in terms of making investments. Similarly, the rate are not to be too cheap
as there will be again an invitation to such crisis. There has been inadequate changes incurred in
the economic activities of the countries (Bakar and Rosbi, 2017). It has demolished various small
and medium size entities as per insufficient funds for the operations. The operating activities in
banks and various financial institution has made improper influences over money, supply,
exchange rates, interest rates as well as over the financial markets. The imbalance currency rates
has lead the economy towards poverty as there has been scarcity of resources which has
impacted over the reduction in individual income level.
The reasoning of financial crisis has created huge changes into operations such as
decrement in the economic level as the banks and various organisation does not leave with any
funds and money with them which has affected in the rise in prices of various commodities.
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Therefore, the rise in the prices of the necessities such as crude oil, petroleum products,
medicines and the necessary natural resources which were being affecting the operational
practices of the organisation (Istiak and Serletis, 2017). The uplift of worldwide economies
which has resulted into making the economic growth on which the inflation remain subdued.
Along with, current upswing, the growth of economy remain comparatively below the average as
the pre crisis. Therefore, the conclusion has been derived here that there has been slow growth in
the economies. Thus, the banks and various economists keen to keep the lower interest rates or
appropriate interest rates which will be assistive for them to have sufficient amount of funds for
operations as well as which will balance the monetary system. Additionally, the governmental
plans and policies are somehow Wee bit vague as they do not make a clear estimation and
analysis over their approaches to reduce the crisis.
Interpretation of graph.
To analyse the behaviour of the federal bank in relation with setting the interest rates
before the crisis and after the crisis. There hare various changes took place and which has
become the major threat to the operational practices. There has been changes into the policies
and planning of the Federal banks in all the nations (Bekaert and Engstrom, 2017). Thus, main
motive is to reduce the impacts of financial crisis as well as balancing the economy for having
better liquidity and ability to meet the long terms as well as short term requirements.
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2 0 0 0 -0 1 -0 1 2 0 0 4 -0 1 -0 1 2 0 0 8 -0 1 -0 1 2 0 1 2 -0 1 -0 1 2 0 1 6 -0 1 -0 1
-4
-2
0
2
4
6
8( % )
On the basis of above graph there has been analysis of the rates on the basis of Taylor and
Federal rates which will be helpful in balancing and making the adequate changes into
operations. It has been observed here that before the crisis the rates were comparatively on the
favourable state. Thus, which indicates a constant rate and gap between both the techniques.
Thus, the time just before crisis the interest rates were comparatively higher such as in 2001.
Thereafter, 2001 the drastic changes took place it incurred into the reduction of rate of return.
Therefore, during that period the banks allowed providing the loans specially sub prime loans to
consumers on lower rate of returns (Dhavale and Sarkis, 2018). It initiates the downfall of
exchange rates in economy which in turn affected financial stability in country. Due to such
drawbacks there has been reduction in the share values, market prices of the shares which in turn
impacts of capital structure of the SMEs. Thus, due to such changes there has been reduction in
the operational viability of the business as they were not having sufficiency funds which will
assists them to have adequate operations.
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The crisis took place early 2008 which remains for the longer period on which various
economies in the world has the direct and indirect impacts. Therefore, developing countries has
to face inflation as there has been rise in the prices of commodities as per reduction in the
currency values. Underdeveloped nations has indirect influence of crisis as per their dependency
over developed nation in terms of resources. The main impact of crisis mainly incurred over
developed nation such as USA, UK, Russia etc. which has faced all the financial drawbacks such
as recession, inflations etc. Moreover, their dependent countries has the indirect impacts in terms
of imbalance trade and payments. Thus, after the period of global financial crisis there are
various changes which took place in the planning and policy making of governmental bodies
(Tang, Xu and Zhang, 2017). In relation with the chart which indicates periodical changes in the
rate of return the federal rate has remained constant which were aimed at balancing the economy
which improve financial health. On the other side, the Taylor prediction over the rates which
indicates the gap between rates. Moreover, these rates were comparatively higher than the actual
federal rate of return. The strategy to manage the rate or return is for improving efficiency of
countries in meeting the short terms as well as long terms debts of the time. It can be said that, an
appropriate control over the debts and liabilities which will lead in having favourable economy
(Some Effects of the Global Financial Crisis on Australian Financial Markets, 2009). The
improvements financial policies will be helpful for making the drastic changes operational
functions of economies.
To have the appropriate recovery from the crisis the banks has intendant to overcome
with the balance sheet recession. Thus, on which they have made plans to make the adequate
increment in the profitability as well as managing debts. In these regards, the private sector has
planned to make the policies which emphasis over improving the productivity, efficiency as well
as enhancing the growth of country. Moreover, to stabilising the ration the favourable level will
be helpful in managing monetary system, financial market as well as developing the appropriate
trend growth (Bekaert and Engstrom, 2017). Thus, the balanced trades and payments will help
the economy to have sufficient growth there are various operations which will be helpful in
managing public debts. There are various debts of nation from other countries as well as the
public debts were also higher so the policies and plans made by Federal banks will have the
positive impacts but it will take time to economy. On the other side, at global level the trend rise
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in investments emerging marketing economies which has affected the downturn of trend offset in
economies.
CONCLUSION
Thus, it was concluded that moreover Federal bank in the very starting phrase was having
idea about what would be happening in coming time but then also no one was taking their
assumptions to be correct which led to fall down of Lehman Brothers and then global recession.
All the tools which were used by them was not that much effective in all course as this needed at
that time. In determination of the above discussion the impacts of global financial crisis has
taken place as to have the inadequate analysis over the global financial crisis. The main impact
of crisis mainly incurred over developed nation such as USA, UK, Russia etc. which has faced
all the financial drawbacks such as recession, inflations etc. Moreover, their dependent countries
has the indirect impacts in terms of imbalance trade and payments. Thus, after the period of
global financial crisis there are various changes which took place in the planning and policy
making of governmental bodies.
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REFERENCES
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Shariah-compliant Islamic Bank: A New Insight of Islamic Financial Engineering.
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Bekaert, G. and Engstrom, E., 2017. Asset return dynamics under habits and bad environment–
good environment fundamentals. Journal of Political Economy. 125(3). pp.713-760.
Bernanke, B. S., 2017. Federal reserve policy in an international context. IMF Economic Review.
65(1). pp.5-36.
Dhavale, D. G. and Sarkis, J., 2018. Stochastic internal rate of return on investments in
sustainable assets generating carbon credits. Computers & Operations Research. 89.
pp.324-336.
Dua, P. and Kapur, H., 2018. Macro stress testing and resilience assessment of Indian
banking. Journal of Policy Modeling.
Farmer, R., 2018. The Role of Financial Policy (No. w24498). National Bureau of Economic
Research.
Gabrieli, T., Pilbeam, K. and Wang, T., 2018. Estimation of bubble dynamics in the Chinese real
estate market: a State space model. International Economics and Economic Policy, 15(2),
pp.483-499.
Istiak, K. and Serletis, A., 2017. Monetary policy and leverage shocks. International Journal of
Finance & Economics. 22(2). pp.115-128.
Lee, K.S. and Werner, R.A., 2018. Reconsidering monetary policy: An empirical examination of
the relationship between interest rates and nominal GDP growth in the US, UK, Germany
and Japan. Ecological Economics. 146. pp.26-34.
Staveley-O'Carroll, J., 2018. Integrating graphing assignments into a money and banking course
using FRED. The Journal of Economic Education. 49(1). pp.72-90.
Tang, Y., Xu, J. and Zhang, X., 2017. China's investment and rate of return on capital revisited.
Journal of Asian Economics. 49. pp.12-25.
Online:
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The Fed and the 2008 Financial Crisis. 2018. [Online]. Accessed through:
<https://www.vox.com/cards/fed_vs_crisis/what-is-the-feds-war-on-the-crisis>.
The Fed’s Role in International Crises. 2018. [Online]. Accessed through:
<https://www.brookings.edu/on-the-record/the-feds-role-in-international-crises/>.
The Supply of Money – bank Behaviour and the Implications for monetary analysis. 2018.
[Online]. Accessed through:
<https://www.ecb.europa.eu/pub/pdf/other/art1_mb201110en_pp63-79en.pdf>.
Some Effects of the Global Financial Crisis on Australian Financial Markets. 2009. [Online].
Available through :<https://www.rba.gov.au/speeches/2009/sp-ag-310309.html>.
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