Macroeconomic Stabilization Policy

Macroeconomic Stabilization Policy

The intervention by the Federal Reserve Chairman, Ben Bernanke and U.S. Treasury Secretary, Henry Paulson was necessary. Because of the financial crisis, it was necessary to slash interest rates, establish new lending programs, and assist troubled financial firms by extending hundreds of billions of dollars. Precisely, the Federal Reserve response was that it would deluge the economy with money by acting as the buyer of the last resort (Gosling & Eisner, 2013). The intervention by the Federal Reserve assisted in stabilizing the mortgage market. Moreover, their action was necessary to stabilize the financial system and ensure that there is a continuous flow of funds from the financial institutions to borrowers.

The intervention by the Feds had the following consequences. First, the intervention cost taxpayers a substantial amount of income. The intervention by the Federal Reserve Chairman and U.S. Treasury Secretary through the Troubled Asset Relief Program cost taxpayers $700 billion (Gosling & Eisner, 2013). Second, the intervention prevented companies from going bankrupt. The government used the $700 billion bailouts to prop up banks and car companies (Gosling & Eisner, 2013).

If the Federal Reserve Chairman and U.S. Treasury Secretary had not intervened, the recession would have intensified. Companies would have continued to report reduced sales, decreased manufacturing activities and deteriorating labor market (Gosling & Eisner, 2013). Second, it would have resulted in a downshift in economic output. Costs would have increased due to psychological consequences, unemployment, and reduced economic opportunities. Third, many financial institutions would have continued to collapse due to bankruptcy.



Gosling, J. J., & Eisner, M. A. (2013). Economics, politics, and American public policy. ME Sharpe.

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