FED billions bounced depression possibilities in 2008 to save the world economy! Doing that was FED Superhero Ben Bernanke, then US central bank Chair. He used massive Quantitative Easing (QE) or massive long-term financial stimulation to bounce the depression monster!
What you learn about how FED billions bounced depression:
In FED billions bounced depression you learn the important economic role of the FED. The U.S. Central Bank plays an important leadership role in the American and world economy. Powerful financial and economic tools support the role of the FED. And the power of those tools was on full display in response to the 2008 financial crisis.
This lesson covers those actions. By knowing and understanding the FED and QE, investors grow their understanding of the economy. They also develop a better understanding of markets and investing. In addition, the lesson covers the causes and cures for the economically related Great Recession.
Understanding the FED also requires knowing the complex interaction of the FED with other key players. As well as the FED, the U.S. Treasury, Congress, and the President played key roles. They came together in response to the Great Recession.
Although there were misses, most actions were helpful. For individual investors, understanding the importance of the FED to markets helps develop your foundation knowledge as an investor. The lesson covers the following points,
FAQ investors ask about how FED billions bounced depression or stopped a possible economic depression
Investors want to know about the FED and quantitative easing. As well, investors need to know the causes and cure for the Great Recession. In response to the threats of 2008 financial crisis, a huge public policy response ended the crisis. Following are questions investors asked and the needed answers.
What is Quantitative Easing?
Quantitative Easing (QE) is a unique and powerful central bank monetary tool to stimulate economic growth.
The usual stimulation, purchasing short-term Treasuries, becomes ineffective when interest rates are near-zero. Then, central banks can turn to QE if the economy needs stimulus.
For example, meager interest rates and the 2008 financial crisis threatened credit and a severe economic decline. To pull back from that economic cliff, central banks used the power of QE funds to buy longer-term mortgage securities.
That supported and funded credit markets to spur economic activity with easy borrowing and spending to support prosperity and prevent deflation.
But the QE downside includes the vast central bank balance sheet growth, a cost left for future repayment.
How did FED Quantitative Easing begin?
Japan was the first to use Quantitative Easing (QE) in 2001 when a real estate collapse became an economic crisis. Then, the FED used QE in response to the 2008 financial crisis.
QE injects massive amounts of long-term funds to stimulate the economy. The FED uses QE to boost the economy when short-term open market activity is ineffective because interest rates are near zero.
QE provided mortgage funds to stabilize prices and prevent depression thinking, which happens when people delay purchases expecting lower future costs, slowing economic growth.
As a result, the FED:
contained the 2008 crisis,
avoided a credit freeze,
stopped an economic collapse,
prevented a depression.
Did the FED prevent an economic depression?
During the 2008 Financial Crisis, the Federal Reserve (FED) prevented an economic collapse with a bold response.
The then-chair of the U.S. Central Bank, Ben Bernanke, injected billions of dollars into the economy, forcing vast amounts into commercial banks to stimulate loan activity. The FED also purchased mortgage bonds aggressively to inject billions and support that market.
U.S. Treasury, political leaders, and Central Banks worldwide followed this Quantitative Easing program. That ensured credit remained available, stopped commercial banks from collapsing, and prevented deflation or the potential for economic depression.
In hindsight, even more stimulation could have prevented the lingering financial and social scars from the following Great Recession.
What led the FED to quantitative easing?
The FED began using quantitative easing in the 2008 financial crisis when the economy verged on collapse with a credit freeze. That triggered a first for the FED, funding billions into the long-term mortgage market.
FED stimulation usually meant short-term buying of Treasuries, but then near-zero interest rates limited the impact of those normal market operations.
So the FED used quantitative easing, a response that helped Japan during a previous crisis. While the intense stimulation was necessary, unexpectedly, it became a years-long FED program.
Years of massive credit market funding expanded the FED balance sheet and slowed private capital's return. Unwinding those unwanted effects will take years as the crisis becomes a memory.
Where did quantitative easing come from?
Multiple economic thinkers claim credit for the economic concept of quantitative easing, which was once considered radical and exotic. However, the debate about who came up with it first continues.
Japan was the first country to implement this concept in 2001 when a bursting real estate bubble caused a deep recession that risked deflation. While quantitative easing helped to avert that risk, it was only moderately successful.
Later, during the 2008 financial crisis, the Federal Reserve led the central banks of the United Kingdom, the Eurozone, Switzerland, and Sweden to implement quantitative easing across an interconnected global economy. This once-radical concept is now considered a mainstream tool used by central banks.
Who profited from the financial crisis?
The 2008 financial crisis and the Great Recession that followed presented many opportunities.
For example, the crisis, caused by an impossibly overdone subprime mortgage market, grossly inflated housing prices.
Then, when that impossible bubble burst, investors that shorted subprime housing made billions!
In response, the stock market panicked and plunged. A bank-led wave of asset seizures swept through the economy.
The Great Recession followed to force business mergers, acquisitions, and liquidations, as well as corporate and personal bankruptcies.
But knowledgeable buyers with cash scooped the assets as investors with vision picked many profitable opportunities from among the mass of distressed securities.
What happened in the Great Recession?
The Great Recession was the severe economic downturn from December 2007 to June 2009 when a U.S. housing bubble burst.
The bubble grew when greed-driven banks, lenders, and credit agencies used low credit standards to fund house buying by bad-risk borrowers.
Mortgages sold globally masked the risk by bundling bad and conventional loans as investment-grade packages.
When exposed, the widespread scam caused a market crash, jobs disappeared, and credit froze in the Financial Crisis of 2007-08. Millions lost homes, employment, and businesses. Only massive government intervention and stimulus funding prevented a depression.
The lingering economic and social effects persisted for over a decade, complicating the pandemic and supply chain disruptions.
How did the economy recover from the Great Recession?
The Great Recession, from December 2007 to June 2009, was the biggest economic downturn since World War II. The Federal Reserve, the U.S. Treasury, and Congress lead a huge worldwide public policy and massive spending response! Every progressive nation included tax cuts, huge government spending increases, stimulation programs, bank bailouts, selected recoveries, and considerable reinvestment. Although the spending was massive, it was not enough to save millions of people and businesses from losing lifetimes of work and savings. Many homes and jobs were taken away in waves of foreclosures and bankruptcies. The Great Recession left many financial scars.
The Quick Quantitative Easing Overview
Quantitative easing (QE) originated as a monetary policy tool used by central banks to stimulate the economy during periods of economic downturn or crisis. The Bank of Japan (BOJ) first used it in 2001 during a period known as the "Lost Decade" to implement quantitative easing in response to prolonged economic stagnation and deflation.
The term "quantitative easing" differentiates this policy from typical monetary policy measures like altering interest rates. Unlike conventional monetary policy, which primarily involves adjusting short-term interest rates to influence borrowing and spending in the economy, quantitative easing means the central bank buys long-term securities directly from the market. Buying securities like government bonds, mortgage-backed securities, or other financial assets forces money directly into the market.
In the wake of the 2008 global financial crisis, the Federal Reserve implemented quantitative easing in the United States. Following suit, other major economies' central banks, like the European Central Bank (ECB) and the Bank of England, adopted quantitative easing measures to support their respective economies.
Quantitative easing is a monetary policy tool used to increase the money supply, lower long-term interest rates, and encourage borrowing and investment to stimulate economic activity and support inflation targets. However, it is a controversial policy with potential side effects and limitations. Some concerns include creating funds that massively balloon the central bank balance sheet, stimulating inflation and asset price bubbles, and increasing income and wealth distribution issues.
The Great Recession Overview
The Great Recession was a severe global economic downturn that began in late 2007 and lasted into 2009. It was triggered primarily by the collapse of the housing market bubble in the United States, which led to a financial crisis and widespread economic turmoil worldwide. The contributors included:
1. Housing Bubble: Rapid price increases fueled by easy access to credit, subprime lending practices, and speculation produced a housing market bubble in the United States that burst in 2007. Home price declines lead to widespread foreclosures and a mortgage market crisis.
2. Financial Crisis: The housing market collapse revealed extensive risky lending practices. That triggered a financial crisis through interconnected financial institutions that dealt in mortgage-backed securities and collateralized debt obligations, which plunged in value. As a result, major financial institutions faced significant losses and liquidity problems, leading to some banks' collapse. In response, massive government interventions stabilized the financial system.
3. Credit Freeze: As banks became hesitant to lend due to uncertainty about their assets' value and borrowers' creditworthiness, credit markets froze up, making it impossible for businesses and consumers to access credit. This exacerbated the economic downturn by hindering investment and consumption.
4. Global Impact: While originating in the United States, it affected the global economy. Many countries experienced recessions as trade, supply chains, and financial links carried the shock across borders. Export-dependent economies suffered from decreased demand, while exposure to toxic assets devalued financial institutions worldwide.
5. Government Responses: Governments worldwide implemented recession-fighting measures, such as Central Banks lowering interest rates and using unconventional monetary policies like quantitative easing to stimulate lending and economic activity. Governments boosted demand and support for struggling industries with fiscal stimulus packages.
6. Job Losses and Economic Contraction: In the Great Recession, job losses and an economic contraction caused high unemployment rates and negative GDP growth in many countries.
The Great Recession was one of the worst economic crises in recent history. It had long-lasting effects on individuals, businesses, and governments worldwide. The crisis exposed vulnerabilities in financial systems and the interconnectedness of the global economy.
Quantitative Easing gets to work
In the 2008 crisis, markets first declined for 6 months. Then they shook off the crisis! That was the beginning of a climb back. For most, the 2008 crisis faded into memory. But it was QE that poured fuel on the economic fire. That stimulation started years of strong growth.
QE was the FED entering the market to buy massive amounts of financial assets. And there was a major difference. Quantitative easing bought long-term securities. That is in contrast to the normal purchase of short-term Treasuries typical in open market operations. That switch to long-term securities comes with a significant impact. The positive impact is long-term support for the bond and credit market. However, it also comes with long-term balance sheet impact on the FED. That will take years to unwind these huge financial commitments.
The QE idea injects huge amounts of liquidity directly into markets to forces long-term money into the economy. That force feeding has carried on for years. In fact, the FED took bad loans from banks to revive their balance sheets. They bought mortgages at the rate of $85 billion per month. Billions became trillions!
Central bank economic invention
As for who invented QE, there is some debate. While John Maynard Keynes, gets credit for the concept of QE. It is Richard Werner, who refined the thinking around using QE. He also coined the term, quantitative easing. And he advised the Bank of Japan. They became the first central bank to use a variation of this powerful central bank tool.
Werner, has a background of a German banking and development economist. He holds the view expanding credit to fund production growth was key. That could open the way to growing the economy and supporting prosperity. As he explained it, in a crisis, central banks clean up the bank balance sheets by taking their non-performing loans. That expands the bank reserves, making funds available to loan for productive growth. As he sees it, focusing on expanding production, grows the economy. And rather than funding consumption, production can expand without inflation. So the economy, employment and wealth grow without inflation.
Keynes, a British economist (1883-1946), is credited with many economic ideas. His thinking fundamentally changed economics and influenced economic policies. He is well known for supporting a strong public policy. The financial and economic moves as well as the financial intervention he suggest are all to support growth, employment and prosperity.
He is a favorite of mine for his quote referring to the stock market:
“The market can stay irrational longer than you can stay solvent.”
John Maynard Keynes, Economist
Saved from the economic abyss
QE worked! The FED billions bounced a depression. That saved the world from falling into an economic abyss! That response to the 2008 financial crisis, meant that Bernanke invested billions to save trillions!
It all began with an overdone real estate market. When the real estate market collapsed, financial disaster loomed. In response it was essential that the FED offer immediate, bold, and strong action. The FED delivered. As a result, the world pulled back from the brink of economic disaster, financial collapse, and economic depression.
Saving trillions and the economy was no accident. Nor was it just good luck. He was the right person with the right knowledge. Ben Bernanke was the perfect FED Chair in that crisis.
As part of his background, he was an expert on the economic history that followed the 1929 stock market crash. As a result, in 2008, he knew saving the economy required immediate, massive stimulation. By monthly buying a massive $85 billion of mortgages, the FED stopped that market from going to zero. The program was called, Quantitative Easing (QE). The QE stimulation supported real estate and cascaded economic stimulation through the economy pulling Americans and the world forward without a depression.
That bold Central Bank action contained the 2008 financial crisis which became the Great Recession but avoided a complete economic collapse. It demonstrated the important role played by the U.S. Federal Reserve. FED actions play an important role in how rich you are will be or even could be. FED actions directly affect investors everywhere.
Bernanke billions saved trillions!
It was not a one-man show! But the actions of the U.S. FED following the Sept. 2008 crisis were critical. Then, the FED billions were used to bounce a depression. And that happened because one courageous, brilliant, and patient man who stood between us and the economic abyss. As a result, we were saved by an imaginative economic magician! He also knew the story of our economic past and could see the economic future. In fact, his actions led us out of a beak economic desert that saved America and the world!
The stimulus programs run by Ben Bernanke did just that. He was the ideal person with exactly the right knowledge and ability in place when the economic alarm bells sounded in 2008. As a result, he saved us from all becoming debris in a financial wasteland. And have no doubt, a wasteland is where we would be if he had not pulled us and the world back from the disaster of a economic depression.
From the unprecedented stimulus program, that continued into a second decade, effects will continue for multiple years yet. Possibly even years beyond the next decade there will be effects that will continue. That puts in into a decade of FED grinding as they attempt to taper the effects and reduce the massive FED balance sheet built under the stimulus program.
Trillion-dollar balance sheet!
Billions here and billions there soon add up to make the massive scale of the Fed stimulus program hard to grasp. That program and FED operations grew the balance sheet well beyond a Trillion Dollars! And then another, and another until 2022 it is approaching $9 trillion! That is a lot of money! Consider that is takes 1,000 billion just to get to that first trillion!
Most particularly the direct and continuing effect on housing is the greatest continuing benefit of the FED QE program. In essence, America continues to fund the mortgage market. That program provided the foundation for rebuilding housing and the American economic recovery.
Fed props up the mortgage market!
FED billions bounced depression most often by their QE program buying long-term bonds to support the mortgage market. Without that, credit would not function and the market would implode. As we experienced in 2008 when the 2008 crisis hit. Then, all private mortgage buyers instantly stopped their bond purchasing. Dead. At that time they did not trust the market information so they simply did not buy.
Without FED intervention, the lack of buyers would instantly crater the bond market. Then, would immediately be followed by a massive stock market plunge. That would soon paralyze the banking system. An unimaginably huge economic tsunami would be unleashed! The outcome would be financial destruction! And that plunge would include every economy on this planet. As a result, we would experience a deep and destructive depression.
Why did the FED make QE happen?
The QE stimulus program continued as part of the Fed effort to prevent economic collapse and depression after the 2008 financial crisis. The FED billions that bounced a depression was needed and done because, economic depressions are sticky. That means, once established, depression thinking takes hold. And depression thinking can make a depression stubbornly linger.
When most people think prices will be lower tomorrow, that is depression thinking. They then put off spending and that slows the economy. Then, once entrenched, such a depression mentality becomes very hard to change. In fact, the depression thinking in the 1930s depression lingered for over 10 years!
Because the FED used QE, depression thinking and a depressed economy was avoided. That took massive amounts of stimulus but it worked and changed the economic outlook.
Inflation is the opposite of deflation
During inflationary times we are willing to spend now or soon because we believe everything will cost more tomorrow. In contrast, the the inflation beast was tamed in 1970’s. At a time of run away inflation was brought under control. It was massive interest rate increases the stopped inflation. It proved to be a painful economic cure. At that time the FED overdid it and stayed on the breaks too long. However, we leave the remainder of the inflation lesson for another day.
Today we continue to look at the fright of deflation. In that battle, economists and central bankers rightly fear the long-term destructive power of deflation. That is because the deflation monster can destroy economies, societies, lives, and futures.
At all costs, all central bankers want to keep any deflationary force contained. If not, letting it emerge or even to let people think it may be loose, would harm the economy. After all, if consumers thought lower prices were possible tomorrow, sales would plunge today. Imagine what would happen to real estate. That market would rapidly freeze as would every capital expenditure program.
In short order, such a chill would cascade through the economy and reach into every household and our pockets. So the FED is determined to make sure that does not happen. And making sure the population thinks there is no possibility of deflation is a core reason for the ongoing Fed QE stimulus program. The overnight credit freeze in Sept. 2008 put the world on the brink of a deflationary abyss. Thank goodness Ben knew what to do.
Ben had the answer
The Fed and other central bankers began pumping massive amounts of money into the market. That worked over the years following the Sept. 2008 economic plunge. Now the U.S. and the world economy continue the recovery process.
How did the FED make credit during the financial crisis?
Simply put, a button on the FED computer creates Fed credit. That is the incredible power of the central banker at work. The Fed used that credit to buy mortgages in the market which puts the money into play. It was used to keep the mortgage market going. That was when no other buyers were willing to fund mortgages. We got to see an economic Einstein was at work. His knowledge, skill and actions saved the world from depression!
Related content: Invention builds banking power, lesson 4, of White Top Investor course 150, Movers & Shakers of Stock Markets.
The FED, Bernanke and tapering
Ben Bernanke and the U.S. Federal Reserve Bank will self-liquidate the trillions in massive mortgage inventory by simply letting the bonds mature.
That great pile grows larger at the rate of $85 billion more each month! This program will directly affect the market for at least another 5 years. Then, once this gusher of money gets turned off, what will happen? Will that huge pile of mortgages overhangs the market?
Move along, nothing to see here…
In a word, no. Not much will actually happen. The Fed will sit on the inventory. Remember their purpose, to get the economy going. The current program works towards that goal through massive stimulation of the mortgage market.
Once that market establishes a new normal, the program will end. It will be a gradual or tapered reduction. That will happen over at least several months and likely extend for more than a year. However they get there, it will eventually come to an end.
When that happens, they will stand aside. No further stimulus will be needed. The Fed will be out of the market. With success, they can declare victory but still have to deal with that accumulated inventory.
Only then will a true normal market exist.
Liquidation risk
But the Fed will not upset the new supply and demand balance by liquidating inventory. Fed selling into the market would be disastrous.
Doing so would have the same effect as an excessive increase in private capital becoming available. To work, a normal market uses price to adjust the balance between supply and demand. Any significant increase in either supply or demand produces price responses to balance the forces.
Keeping that basic balance requires the Fed to sell slowly or let their inventory self-liquidate. That will help maintain an orderly market. Therefore the Fed will simply let their bond inventory mature. Brilliant!
Refinancing mortgages
Essentially the inventory consists of an unimaginably large but very real pile of 5-year bonds. As each matures, normal refinancing occurs. The old bond gets redeemed or paid off. The new or replacement bond is sold into a normal market to serves as the replacement.
The Fed simply stands aside from the new transaction. Like a rich wizard quietly getting the wanted outcome.
This will happen millions of times as your neighbors and millions of others go through routine mortgage refinancing. As a result the Fed quietly reduces inventory without upsetting the market and we all happily carry on to prosperity.
Well, that is the theory. Being us, we humans always seem to find some way to make things more exciting in the years ahead. For now, we can be content that the Fed has done an incredible, innovative and effective job. For now, we are happy with the good news; the market will mend as will damaged portfolios.
Question Answered!
Yes, FED billions bounced depression, and we credit Ben Bernanke or the FED, economic depression was avoided by QE. That program demonstrates the important economic role of the FED. The gigantic financial and economic power of the FED was used to bounce an economic depression.
Lesson takeaways,
FED billions bounced depression:
FED billions bounced depression possibilities in 2008 to save the world! FED Superhero Ben Bernanke, then Chair of the powerful U.S. Central bank, used massive financial stimulation to bounce the depression monster away!
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Investors, The FED And Central Banks, lesson links:
Central bank creation and role explained Lesson 1
FED billions bounced depression Lesson 2
FED begins Quantitative Tightening Lesson 3
FED market direction signals Lesson 4
Most powerful civil servant Lesson 5
Trillions stimulated Japanese economy Lesson 6
Central Banks of Canada, UK and Europe Lesson 7
Central bank lid and base setting Lesson 8
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FED begins Quantitative Tightening
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