Government Crisis - Central Banks

Central banks are considered monetary policies to regulate foreign currency exchange rates and money supply. Now central banks will buy domestic currency and sell foreign currency to reduce the money supply in the system. Central banks use buying foreign currency as a way to increase the money supply, but they also prefer to buy their own currency or from another nation to keep control of the exchange rates because of the level of inflation.

The central banks needed to stabilize the financial system in 2007-2009 by coming together with other bankers and lowering interest rates to improve the financial system. Now in 2009 the fed had reported earnings of $ 52.1 billion, of which$ 2.9 billion were the gains on loans that were extended to bank institutions, main dealers and others, according to the press release on Jan 12, 2009. On the financial side cutting interest rates or even possibly fixing the rates to affordable levels will increase the money supply thus stimulating the economy back on its feet. When world economy was going through financial crisis, central banks along with government took steps to stabilize financial market, reinstall investor’s faith in market and stimulate economy. The central banks tried to infuse more liquidity in system and lower the cost of borrowing. They lowered CRR which left more money with banks for lending. Central bank also lowered discount rate which made the cost of borrowing cheaper. In addition to that, central banks also allowed commercial banks to borrow from central bank at lower rate. All these steps taken by the central bank ensured adequate liquidity in system and lower cost of borrowing.

During 2008 and 2009, central banks (such as Bank of England, Bank of China, and the Federal Reserve) pumped money in economy to revive the economy. During 2008-2009, USA pumped 2% of GDP, China pumped 3.1% of GDP and England pumped 1.6% of GDP into the economy. (Source: whitehouse.com). In 2009, GDP of USA was $14,256,275

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