Greenspan�s Legacy and Bernanke�s attitude to the Financial Crisis

The Federal Reserve System or the Fed is one of the most prestigious institutions in the world. Founded by the Federal Reserve Act in 1913, the Fed has the responsibility of setting the monetary policy of the U.S. The Fed�s actions affect the money supply in the U.S. market which has a direct influence on interest rates, growth and inflation. To better understand the role of the Fed we will first describe its structure and organization. We will then see who is really behind the central bank�s actions and who holds the reins of power inside the institution that plays the most important role in financial markets throughout the world. The monetary policy implemented by the Fed is closely monitored by major financial markets and institutions as it affects directly investments and security prices. We will explain clearly how the Fed conducts its monetary policy using three major tools to either decrease or increase money supply: open market operations, adjusting the discount rate and adjusting the reserve requirement ratio. We examine the main objectives of the Fed�s monetary policies and how those objectives maintain a �conflict of interest� relationship. A special interest we devote to a possible negative role that monetary policy may play in fuelling excessive asset price booms and we ask whether monetary policy should contradict the growth of asset price bubbles. Finally we examine the policies of the former chairman of the Fed Alan Greenspan (1987-2006) which contributed to the current crisis. We also assess the reaction to the crisis of the monetary policy of Ben Bernanke.