Greenspan’s Conundrum and Bernanke’s Nightmare

Case Solution

Francis Warnock
Darden School of Business ()

At what point in a recession should the Fed initiate risky expansionary monetary policy – that is, aggressive purchases of long-term government bonds by the Fed? Federal Reserve Bank Chairman Ben Bernanke asked himself this question in 2009. Suitable for both MBA courses and electives in global financial markets, this case examines the risks associated with policies that are dangerously close to monetize the budget deficit. Students consider the factors behind current and future levels of long-term interest rates in the United States from Bernanke’s perspective. The Federal Reserve’s Open Market Committee had already lowered the federal funds rate from 5.25% in 2007 to around 0%; an almost unfathomable attempt had also begun to break free from frozen credit markets and facilitate lending to further ease monetary conditions.

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