The 2008 Financial Crisis and the Role of Central Banks Explained

Hello, this is Bitpunk. Today we'll look at the 2008 financial crisis and the role of central banks.

What is a financial crisis? A financial crisis means that the institutions that run the financial system are in trouble. The most common financial institutions are banks and investment firms.

When financial institutions that manage customers' money are in trouble, it means money is no longer flowing smoothly. And when the flow of money gets blocked, liquidity shrinks and market interest rates rise. There are people who want to borrow money, but there isn't much money available to lend, so anyone who wants to borrow ends up having to pay higher interest. The problem is that when the economy is already weak, these rate increases can make the economy even worse.

Central Bank Intervention and Quantitative Easing

This is where the central bank steps in to stop the vicious cycle. A central bank has the authority to supply money to commercial banks. Through quantitative easing, which means printing more money than before, it starts supplying liquidity to commercial banks. During the 2008 financial crisis, this is exactly what happened: the central bank stepped in and printed dollars.

Starting to make sense?

To sum up what we've covered so far: a crisis hits financial institutions -> concerns about rising interest rates and a worsening economy -> the central bank steps in and releases money -> liquidity increases -> interest rates fall -> the economy stabilizes and grows.

The Fed and the Regular FOMC Meetings

Finally, let's take a quick look at the Federal Reserve, the central bank of the United States. The Federal Reserve is often shortened to simply "the Fed."

As mentioned earlier, a central bank like the Fed has the authority to print dollars and supply them to financial institutions. In other words, the amount of U.S. dollars in circulation is controlled by the Fed.

Here's what the Fed does depending on the state of the economy.

When the economy is weak, the Fed rolls out stimulus through quantitative easing. In other words, it prints more dollars to lower interest rates. When the economy shows signs of overheating, it reduces the dollar supply or pulls dollars back in to push interest rates higher than before.

The Fed, which sets the U.S. benchmark interest rate and controls the dollar supply like this, holds a meeting once every 45 days. Jerome Powell, whom people jokingly call "Streamer Powell," is the current Chair of the Fed. Through these meetings, the Fed decides on interest rates and monetary policy.

The official name of these regular meetings is the FOMC. FOMC stands for Federal Open Market Committee. In Korean, it's called 연방공개시장위원회.

It's no exaggeration to say that the United States, as today's global superpower, leads the world economy. That's why so many people pay close attention to the results of FOMC meetings. In fact, the stock and crypto markets can swing sharply depending on what's said at these meetings.

Key Takeaways

Today we looked at the 2008 financial crisis and the role of central banks. To sum up:

When financial institutions face a crisis in which the flow of money and liquidity deteriorates, there are concerns that rising interest rates will worsen the economy. So the central bank steps in, printing dollars to supply liquidity and stabilize interest rates. Conversely, when the economy overheats too much, it reduces liquidity to try to push interest rates up.

The central bank of the United States is the Federal Reserve (Fed), and through the FOMC it decides the U.S. dollar supply, interest rates, and monetary policy.

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