ECO 473 Dr Dennis Foster WA Franke College of Business Monetary Policy Contemporary Issues I Heading into crisis II The bank failures III Fed inaction amp action IV What has the Fed accomplished ID: 812968
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Slide1
Monetary Policy: Contemporary Issues
ECO 473 - Dr. Dennis FosterW.A. Franke College of Business
Slide2Monetary Policy: Contemporary Issues
I
Heading into crisis
II
The bank failuresIII
Fed inaction & action
IV
What has the Fed accomplished?
V
The problem with policy
VI
The Austrians & rethinking policy
Slide3What does the Fed Want?
Policy? Stimulate spending by
reducing interest rates.
Why? They are Keynesians.
Effect? Creates housing boom.
A healthy & strong economy with low unemployment and low inflation.
I. Heading into crisis
Slide4Federal Funds rate of interest, 1995 to 2004
Slide5Median home prices, 1999 to 2006
Slide6Home sales, 1999 to 2006
Sept. 2005
Slide7The Bear Stearns Story
$133.20 - 52 week high prior to collapse.
2007 - Lost billions in collapsing subprime market; slowly recovering.
March 2008 - Assets/equity = 35
Lots of assets in MBS.
Spring 2008 - Clients pulling out funds.
3/10/08 - Turned down for $2 b. loan
Continued loss of confidence in Bear all week.
3/13/08 – Cash
from $10 b. to $2 b.
$400 b.
Assets
II. The bank failures
Slide8Tried to get LOC w/JPM for $25 b.
3/14/08 – Fed lends $13 b. for 3 days.
JP
Morgan deal - $2 per share!
Fed
creates Maiden Lane LLC
Fed loans ML $30 b.
JPM “sells” bad assets to ML.
3/24/08
- New stock deal - $10/share.
Cost to the Fed?
Was Bear TBTF?
Yes!
What about Lehman?
The Bear Stearns Story
Slide9The Three Failures:
IndyMac WaMu Lehman
IndyMacSpun off from Countrywide.Not a “mac”Overleveraged on “Alt A” loans.WaMuShut down 100’s of offices 2007-08.Sub-prime victim.
Final 10 days lost $17 b. in cash w/dLehman Brothers
Losses = $7 b. in Q2 & Q3Final day: $1 b. in cash
$32 b.
Assets
$300 b.
Assets
$640 b.
Assets
Slide10Stock prices collapse for
IndyMac
WaMu
Lehman Bros.
$45 to $.25
18 months
Slide11Stock prices collapse for
IndyMac
WaMu
Lehman Bros.
$44 to $0
12 months
Slide12Stock prices collapse for
IndyMac
WaMu
Lehman Bros.
$65 to $5
8 months
Slide13Did the Fed see this coming?
III. Fed inaction & action
"We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe
stabilize…”
-July 2005
"
House prices have risen by nearly 25 percent over the past two
years… [T]
hese
price increases largely reflect strong economic fundamentals."
-October 2005
"
At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained
."
-March 2007
"
It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions."
-October 2007
"
The Federal Reserve is not currently forecasting a recession
."
-January 2008
"
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
-June 2008
Slide14What did the Fed do?
"
One myth that’s out there is that what we’re doing is printing money. We’re not printing
money."
-December 2010
Quantitative Easing.
Buy Treasuries.
Buy MBS.
Boost short term lending.
Raise the money supply
Lower interest rates.
Slide15Federal Funds rate of interest, 2004 to 2019
IV. What has the Fed accomplished?
5.25%
11/2019
1.55%
Slide16$4.04
tr
The Fed Charts New Territory – 2008 to 4/2019
Assets
$
1.44
tr
$
2.22
tr
Slide17$
1.48
tr
$4.04
tr
$
1.74
tr
Liabilities
The Fed Charts New Territory – 2008 to 4/2019
Slide18Home sales, 1999 to 2015
Housing Revisited
October 2019
5.46
mill.
Slide19Median home prices, 1999 to 2015
Housing Revisited
October 2019
$
270,900
Slide20What has the Fed done?
Has it maintained the value of the dollar?
Has it stabilized the economy?
Has it reduced moral hazard?
Has it lessened distributional problems?
Is the risk of inflation gone?
V. The problem with policy
Slide21What is the exit strategy?
The FED will have two choices:
Continue policy
hyperinflation
Halt policy recession
Or . . . Wage/Price controls?
Slide22Rethinking Policy:
The Austrian School of Thought
Recessions are the solution,
not the problem!
Keynesian policy -
interest to
spending.
Leads to misallocation of resources.
Leads to an unsustainable
b
oom.
Leads to eventual conflict (C vs. I).What should we do?
Wait!!
VI. The Austrians & rethinking policy
Slide23Rothbard - A Return to Sound Money
Get back on the gold standard.
Define $ in terms of gold.
No more suspensions of payment in gold.
Abolish the Federal Reserve.
Redeem every $ of M1 in gold…
Get government out of money.
Bank notes will replace FRN.
100% reserve ratio
Or, let banks fail.
Abolish FDIC, US Mint.
Slide24The Results of Sound Money
No bank panics.
No convoluted regulation.
No inflation.
No discretionary monetary policy.
No monetizing of federal gov’t. debt.
An end to the business cycle!!
Slide25A Tale of Four Recoveries
Slide26The
New Normal? –
Annual RGDP 1983-2019
Slide27GDP (
2015)
=
$23.5
tr. vs. $
16.4
tr.
1990 -
2015
net gain =
$59
tr.
3.8%
What if … ?
Slide28Let bad firms/banks go bankrupt.
We don’t lose real resources!!!!!
Abolish Fannie & Freddie.
End the Fed.
End the government monopoly on money.
Slide29ECO
481:
Public Choice Theory
Dr. Dennis Foster
FCB
#308
The
W.A. Franke College of Business
Northern Arizona University
Spring
2020
Why Government Fails
Slide30Monetary Policy: Contemporary Issues
ECO 473 - Dr. Dennis FosterW.A. Franke College of Business