Transcript WA Franke College of Business - Oak

Monetary Policy:
Contemporary
Issues
ECO 473 - Dr. Dennis Foster
W.A. Franke College of Business
Monetary Policy: Contemporary Issues
I
II
III
IV
V
VI
VII
Heading into crisis
The failures
Fed inaction & action
What has the Fed accomplished?
The problem with policy
The Austrians & rethinking policy
Outlook for the economy
I. Heading into crisis
What does the
Fed Want?
• A healthy & strong economy
with low unemployment and
low inflation.
• Policy? Stimulate spending by
reducing interest rates.
• Why? They are Keynesians.
• Effect? Creates housing boom.
Federal Funds rate of interest, 1995 to 2004
30 year mortgage rate, 1995 to 2004
Median home prices, 1999 to 2006
Home sales, 1999 to 2006
Sept.
2005
The Bear Stearns Story
II. The failures
• $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
$400 b.
Assets
 Continued loss of confidence in Bear all week.
• 3/13/08 – Cash  from $10 b. to $2 b.
The Bear Stearns Story
• Tried 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 Three Failures:
IndyMac WaMu Lehman
• IndyMac
$32 b.
Assets
– Spun off from Countrywide.
– Not a “mac”
– Overleveraged on “Alt A” loans.
• WaMu
$300 b.
Assets
$640 b.
Assets
– Shut down 100’s of offices 2007-08.
– Sub-prime victim.
– Final 10 days lost $17 b. in cash w/d
• Lehman Brothers
– Losses = $7 b. in Q2 & Q3
– Final day: $1 b. in cash
III. Fed inaction & action
Did the Fed see this coming?
III. Fed inaction & action
Did the Fed see this coming?
What did the Fed do?
• Cut interest rates.
• Lend to everyone.
• Quantitative Easing.
IV. What has the Fed accomplished?
Federal Funds rate of interest, 2004 to 2015
Fed Lending Programs: 2008-2010
See Appendix B for details
Housing Revisited
30 year mortgage rate, 2004 to 2015
Housing Revisited
Median home prices, 1999 to 2015
190,000
Housing Revisited
Home sales, 1999 to 2015
The Fed charts new territory.
V. The problem with policy
$4 tr.
Monetary
Base
Excess
Reserves
$2.6 tr.
$2.5 tr.
Fed-held US
Treasuries
$1.7 tr.
Fed-held
MBS
The Quantitative Easing Programs
+649%
+178%
+44%
A Tale of Four Recoveries +25 Q
+33%
+24%
+18%
+14%
What is the exit strategy?
• The FED will have two choices:
• Continue policy  hyperinflation
• Halt policy  recession
• Or . . . Wage/Price controls?
What 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?
VI. The Austrians & rethinking policy
Rethinking 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 boom.
• Leads to eventual conflict (C vs. I).
• What should we do? Wait!!
2008
1981
1920
2015 Nov. 5%
Rothbard - 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.
The Results of Sound Money
1.
2.
3.
4.
5.
No
No
No
No
No
bank panics.
convoluted regulation.
inflation.
discretionary monetary policy.
monetizing of federal gov’t. debt.
6. An end to the business cycle!!
What if … ?
3.8%
GDP (2015) = $23.5 tr. vs. $16.4 tr.
1990 - 2015 net gain = $59 tr.
• Let bad firms/banks go bankrupt.
– We don’t lose real resources!!!!!
• Abolish Fannie & Freddie.
• End the Fed.
• End the government monopoly on
money.
VII. Outlook for the economy
What is the Outlook?
• Interest rates will stay low.
Yellen hints at increases.
Banks awash in cash
Economic performance is weak.
• Inflation is still a looming danger.
Where will all the money go?
Can the Fed stop rising inflationary expectations?
•• Best
case
scenario?
Worst
case
scenario?
Economy
sluggish,banks
Ur stagnant,
and
Economyis surges,
lending,
and
hold inflation.
massive XS reserves.
andbanks
dramatic
Another
yearwithin
(or 2?)3 on
the knife edge.
Recession
years???
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ECO 481:
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W h y
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Dr. Dennis Foster
FCB #208
Monetary Policy:
Contemporary
Issues
ECO 473 - Dr. Dennis Foster
W.A. Franke College of Business
Appendix A: Stock prices collapse of
IndyMac, WaMu, Lehman Bros.
Appendix B: Fed Lending Programs
Term Auction Credit
Appendix B: Fed Lending Programs
Primary Dealer Credit
Appendix B: Fed Lending Programs
Commercial Paper MMMF
Appendix B: Fed Lending Programs
Asset-backed Securities
Monetary Policy:
Contemporary
Issues
ECO 473 - Dr. Dennis Foster
W.A. Franke College of Business