Transcript Slide 1 - WordPress.com

Federal Reserve Challenge
December 10 2008
Damian Gray
Ben Blieden
Scot Weisman
Adam Nichols
Robert Searle
Monetary Policy Recommendations
Maintain Fed Funds Rate at 1%
Lower Cost of Capital
Purchase Long term Debt
Create Innovative Lending Facilities
Percentage Change GDP
6
5
4
3
2
1
0
-1
Source: BEA
3rd Quarter GDP -.5%
•
•
•
•
•
Personal consumption 3.7%
Government consumption 5.4%
Business Investment .4%
Exports 3.4%
Imports 3.2%
GDP = C+I+G+(X-M)
Source: BEA
GDP forecasts
• Goldman Sachs predicts 4th quarter GDP
will go down 5%
• Personal consumption will continue to
decrease in 2009
• Barack Obama’s plans will boost
government consumption in 2009
Source: CNN
-100
-400
-500
-600
-200
-300
Total Year to Date:
Nearly 2 Million
Source: BLS
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Feb-07
Mar-07
Jan-07
Loss of Jobs
300
200
Nov. 8: 533,000
100
0
7
2
1
Jan-00
May-00
Sep-00
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Unemployment Rising
8
January 2008: 4.9%
6
5
4
3
November 2008: 6.7%
Source: BLS
0
Other employment problems
• Unemployment – lagging indicator
• Increase in underemployment
– The number of workers who are working part time for
economic reasons has increased by 2.8 million in the
past year
• Increase in discouraged workers
– In the past year discouraged workers have gone up
from 259,000 to 608,000
Source: BLS
Unemployment Forecasts
• Unemployment will continue to rise
throughout 2009 and by December it may
reach 9-10%
• Obama is planning to create millions of
jobs through extensive government
spending
Source: CNN Money
-0.5
-1
-1.5
Inflation
Core Inflation
Source: BLS
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Feb-07
Mar-07
Jan-07
Inflation vs. Core Inflation
1.5
1
0.5
0
Deflation and Collateral
Deflation can lead to significant declines in
the value of collateral owned by
households and firms, making it more
difficult to borrow
Falling collateral values on outstanding
loans, reduces manufacturing and lowers
consumption
Inflation Targeting
Making the Fed's inflation goals more
explicit could reduce uncertainty and assist
business and financial market planning
Housing Bubble
• Irresponsible Lending/Borrowing
– Fannie and Freddie mortgages rose 600% during the
90s surpassing $5T
– Housing prices jumped 80% in 8 years
• Lack of regulation & oversight
• Credit regulators not understanding how to rate
collateralized debt obligations (CDOs) and
commercial mortgage-backed securities (MBSS)
Source: CNBC
Inflated home Prices
Rise in Mortgage Rates
8
7
6
5
4
3
30 Year Fixed
1 Year ARM
2
1
Source: Bloomberg
0
Rising Energy Costs
(CPI) Energy
Fall in Home prices and
Non-Farm Payrolls
Rise in Foreclosures
Failures
•
•
•
•
•
•
Bear Stearns -> JPMorgan Chase
Lehman Brothers ($1.35B) -> Barclays
Wachovia ($15.1B) -> Wells Fargo
Washington Mutual -> JPMorgan Chase
Countrywide -> Bank of America
Merrill Lynch -> Bank of America
Multiplier Effect
The decrease in the velocity of money has a
multiplier effect because money being
introduced by the Fed is not being multiplied
Instead creating a contraction - The slowing
velocity leads to a negative multiplier effect
Money Supply Increasing
M1 Multiplier Decreasing
Personal Consumption (Percent Change)
5
4
3
2
1.2%
1
0
-1
-2
-3
-4
-5
-3.7%
Source: BLS
Jan-05
Jan-43
Jan-81
Jan-19
Jan-57
Jan-95
Jan-33
Jan-71
Jan-09
Jan-47
Jan-85
Jan-23
Jan-61
Jan-99
Jan-37
Jan-75
Jan-13
Jan-51
Jan-89
Jan-27
Jan-65
Jan-03
Jan-41
Jan-79
Jan-17
Jan-55
Jan-93
Consumer Confidence Falls
120
100
80
60
40
20
Source: Conference Board Consumer Resource Center
0
Why Consumer Confidence
is Falling
• Tight credit conditions
• Job losses
• Falling incomes
• Uncertainty of the future
Consumer Saving
Jan-05
Jan-47
Jan-89
Jan-31
Jan-73
Jan-15
Jan-57
Jan-99
Jan-41
Jan-83
Jan-25
Jan-67
Jan-09
Jan-51
Jan-93
Jan-35
Jan-77
Jan-19
Jan-61
Jan-03
Jan-45
Jan-87
Jan-29
Jan-71
Millions of Dollars
Falloff in Retail Sales
Retail Sales (excluding food) per month
350000
340000
330000
320000
310000
300000
Source: www.economicindicators.gov
290000
Troubled Asset Relief Program
• Treasury’s Capital Purchase Program
– Recapitalize bank balance sheets
National Debt
• Greater Than $11trillion, October 1st, 2008
• Over 73% of GDP
• Largest ever during WWII at 122%
Source: IOUSA
Debt as a % of GDP
Who Owns the Debt ?
• Government Accounts (Trust Funds)
– Largest is Social Security
– Medicare, Medicaid problems as population ages
• Publicly-held: $6.302 trillion
– $2.74 trillion foreign-owned
– Japan $585.9 billion & China $541 billion
• Congress has approved 6 increases of the debt limit
since 2002, totaling $4.915 trillion
– Most recently Oct. 3, 2008 - $700 billion
Concord Coalition
Budget FY 2008
• $2.5 trillion in revenue
• $2.9 trillion in spending
$400 billion deficit in the FY 2008 budget
Deficit
14%
Other
2%
Personal Income Tax
41%
Corporate Income Tax
12%
Payroll FICA
31%
Source: IOUSA
Cost to Economy of Big Three
Auto Makers Failure
239,341
973,969
1,738,034
$150.7 billion
$14.3 billion
$21.1 billion
$24.7 billion
Direct job losses
Supplier job losses
Related industry jobs
Personal income
Increased transfer payments
(unemployment)
Social Security payroll taxes
Personal income taxes
Source: CNN Money
Annual Auto Industry Jobs Loss
Source: BLS
Unfunded Promises
$53 trillion in promises
Medicare (D)
8
15%
Misc
1
2%
Liabilities
11
21%
Social Security
7
13%
Chart
shown
in trillions
Medicare (A,B)
26
49%
Source: IOUSA
Negative Effects
• With Rising Unemployment
– Tax Revenue drops
– Increasing the deficit
– Decreasing our solvency
• Unfunded promises rising on top of debt
• Example set for over leveraging
consumers
Seasonally Adjusted
Year
Source: BLS
2006-04
2003-07
2000-10
1998-01
1995-04
1992-07
1989-10
1987-01
1984-04
1981-07
1978-10
1976-01
1973-04
1970-07
1967-10
1965-01
1962-04
1959-07
1956-10
1954-01
1951-04
1948-07
1945-10
1943-01
Dollars ($)
Rising American
Consumer
Debt
Consumer
Debt
3000000
2500000
2000000
1500000
1000000
500000
0
1977 Amendment to the
Federal Reserve Act
1.to promote "maximum"
sustainable output and
employment
2.to promote "stable" prices
Monetary Policy Focus
Encourage business investment and
consumer spending by:
–lowering the cost of capital
–increasing the availability of credit
Declining Commercial and
Industrial Loans
Falling Gross Private Domestic
Investment
Effective Rate vs. Target Rate
Quantitative Easing
• Current lending facilities
– Term Auction Facility (TAF)
– Term Securities Lending Facility (TSLF)
– Primary Dealer Credit Facility (PDCF)
– Commercial Paper Funding Facility (CPFF)
– Term Asset-Backed Securities Lending Facility
(TALF)
– Interest on Reserve Balances
Expanding Reserve Bank Credit
Interest on Reserves
• Nov 5th action to set remuneration rate
equal to target enables better control of
effective rate
• Encourages banks to hold reserve
deposits at Fed - further expansion of
consumer and business credit facilities
The Rising Effective Fed Funds Rate
Since November
Growth of Reserve Balances at
Federal Reserve Banks
Term Asset-Backed Securities
Facility (TALF)
• For growth to occur there must be
consumer spending and business
investment
• TALF aids credit markets for consumers
and small businesses by incentivizing
lending for banks
FRBNY
ABS
Collateral
Non-Recourse Loan
Bank
AssetBacked
Security
Loan
$$$
Consumer
and Small
Business
Small Business
• Employs more than half of private sector workers
• Generate half of new net jobs annually over past
decade
• Account for more than1/2 of nonfarm GDP
• Small firms cannot offer innovative new products or
services without competitive credit.
http://www.federalreserve.gov/newsevents/testimony/mi
shkin20080416a.htm
Long Term Debt
• Purchase long term Treasury and agency
(Fannie, Freddie, etc.) debt to influence
yields
Purchases on the open market:
• Drive down yields
• Influence other long term interest
rates across the financial markets
30 Year Bond Yields Falling
10 Year Treasury Notes Falling
National 20 & 30 yr Fixed Mortgage
Rates Falling (bankrate.com)
Fiscal Recommendations
• Complement Fiscal Policy
New lending facilities
• Infrastructure Development
• Green Technology
Increase Consumer Confidence
• Create Jobs through incentives (green)
• Housing opportunities and retention
• Fed & Treasury work to make FDIC Insurance
permanent
Obama’s Short Term
Emergency Plan
• A thousand dollar ($1,000) emergency energy
rebate
• Fifty billion dollars to jumpstart the economy and
save 1 million Americans from losing their jobs
• $ 25 Billion Stake Growth Fund
• $ 25 Billion Jobs and Growth Fund
Source: Barackobama.com
Obama’s Plan for Business
•
Create 5 million new jobs through Green, Clean Energy,
and Alternative Fuel Initiatives
– $150 billion over 10 years
• Biofuels and fuel infrastructure
• Commercial scale renewable energy
• Double Funding for Manufacturing Extension
Partnerships
• Boost Renewable Energy Sector
– 25% of American electricity from renewable resources by 2025
Source: www.barackobama.com
Infrastructure Investment
• Create National Infrastructure Reinvestment Bank
• Transportation Infrastructure Projects across USA
• Create up to 2,000,000 jobs
• Stimulate new business activity
Source: www.barackobama.com
INFRASTRUCTURE
Complement Fiscal Policy Initiatives
• Create New Lending
Facilities SPECIFICALLY
for Infrastructure
Improvements
• Low Cost Financing will
promote Business
Opportunity and Expansion
• Jobs Created
GDP = C+I+G+(X-M):
G will lead to
I, which will also promote C
Historical Perspective – Lessons Learned
Prosperity of the 1990’s was due to:
• Advance of the Internet – new opportunities
• Moore’s Law – every 18 months technology was
predictably smaller, faster, cheaper to produce
• New companies with new products
• Ability to use, process INFORMATION
•New Technologies
•New Companies
•New Jobs
•Higher Wages
• Better , Cheaper
Technology and
Efficiency keeps
Inflation in check
Dependence on Oil –
The Cost Push Problem
Cost Push Inflation – where resource or
input prices cause finished goods prices to
rise, would still be a problem (like OIL
prices)
Recommendation
The Fed funds alternative technologies
through new lending facilities to reduce our
dependence on foreign oil
Get Back to Innovating
• Get back to Innovating, Producing new
Alternative Energy Products
• Reduce our dependence on foreign oil
• Lowering Imports, Export New Innovations
• New Green Technologies will spur new
Opportunities
Creating New Lending Facilities SPECIFICALLY for New
Technologies:
New Products, New Companies, New Jobs
GDP = C+I+G+(X-M):
I will lead to C, and will also help promote (X-M)
M3 Growth in 90’s
• Provides needed liquidity to larger
businesses, both financial and nonfinancial
• Provides profitable situation for Treasury
and taxpayers that can assist in new fiscal
policy expenditures
Federal
Reserve
Treasury
Commercial
Banks
Private
Assets
Loan $$$
Business
Maintain Target Rate at 1%
• Concentrating on Long Term Rates
strategy, with Fed Communication:
As with fiscal policy, public beliefs about how
monetary policy will perform in the long run
affect the effectiveness of monetary policy in the
short run. **
**Remarks by Governor Ben S. Bernanke At the Annual Washington
Policy Conference of the National Association of Business
Economists, Washington, D.C. March 25, 2003
Avoid Liquidity Trap
• Avoid nominal rate dropping to 0%
• Reserve this option for Q1 2009 in case
the economy does not respond to Fiscal
initiatives
Money Market Squeeze
Lowering FFR below 1% will squeeze
Money Markets:
• Money Market Expense Ratios make it
difficult to manage money funds for banks
• Losses in U.S. money market mutual
funds will cause investors to stay away
from short-term markets
Fed Recommendations
•
•
•
•
•
•
Maintain Fed Funds rate at 1% at this time
Continue “Quantitative Easing”
Continue paying Interest on Reserves
Maintain lending facilities
Purchase long-term debt
Create new “Private Asset Exchange Lending”
program
Effects on GDP
These Recommendations should:
• Increase Confidence between Banks (encouraging
lending)
• Loosen tight consumer credit (encouraging
consumption)
• Support Manufacturing (increasing employment)
• Promote innovation (get us off oil, increase investment)
• Increase Consumer Confidence (promoting spending)
• Reverse the GDP downward Trend (C+I+G+(X-M))
Questions