Transcript WA Franke College of Business - Oak

Monetary Policy:
Contemporary
Issues
ECO 285 - Dr. Dennis Foster
W.A. Franke College of Business
Monetary Policy: Contemporary Issues
I
II
III
IV
V
VI
Heading into crisis
The failures
Fed inaction & action
What has the Fed accomplished?
The problem with policy
The Austrians & rethinking policy
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, 2006 to 2016
5.25%
0.5%
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.
$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%
V. The problem with policy
What is the exit strategy?
• The FED will have two choices:
• Continue policy  hyperinflation
• Halt policy  recession
• Or . . . Wage/Price controls?
A Tale of Four Recoveries @ +29 Q
+36%
+29%
+18%
+16%
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
2016 March 5%
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.
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The W.A. Franke College of Business
Northern Arizona University
Spring 2017
ECO 481:
Public Choice Theory
W h y
G o v e r n m e n t
F a i l s
Dr. Dennis Foster
FCB #308
Monetary Policy:
Contemporary
Issues
ECO 285 - Dr. Dennis Foster
W.A. Franke College of Business