Professional Documents
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Written by: Bilesh Ladva and ECO301 classmates. Presented by Bilesh Ladva 11 and Alice Su 13, Princeton University, USA, undergraduates
Structure of Presentation:
Background- Causes etc. Overview of programs used to combat recession Success of programs Reversing the programs Questions and discussion ( the most important part!)
By Alan Blinder, leading Macroeconomist, former Vice Chairman of the Fed and Princeton Professor! Quote from my first Macro course at Princeton
AIG debt downgraded by all three major rating agencies Federal Reserve loans $85B
Caught off guard Deemed too interconnected, too huge, too global >$1 trillion
TARP
Troubled Asset Relief Program or Mortgage Bailout Bill Presented by Secretary of the Treasury Henry Paulson on 9/19/08 and passed on 10/3/08 Gave the US Treasury $700B in purchasing power
Ben Bernanke
BA Harvard University 1975, PhD MIT 1979. Chair of Princeton University Economics Department 1996-20 02 Chairman on Board of Governors of Federal Reserve System 2002-2005 Chair of Federal Reserve System- 2006-present Interested in Economic and political causes of the great depression
Feds Targets
Relieve the disruptions in credit markets Restore the flow of credit to households and businesses Restore overall economic growth Foster maximum sustainable employment and stable prices Effectively address the potential failure of systematically critical non-bank financial institutions
How does lower Fed Funds Rate help the economy? (cont.)
M/P = Y* L(i) LM Equation Increase in money lower interest rate increase in investment increase in demand and output Private consumption, C unambiguously increases Overall, monetary policy increases output and decreases interest rate
IS-LM Graph
IS LM Analysis of Feds Monetary Policy
Interest rate, i LM (for M/P) i* LM shifts down LM (for M/P > M/P) i decreases Y increases
IS Y* Y Output, Y
Establishment of TAF
Term Auction Facility (TAF)
Provides fixed quantities of term credit to depository institutions through an auction mechanism
Borrowers provide anonymity Seems largely to have solved banks hesitant problem
The Fed stepped in bought $10 billion of commercial paper/week, which increased investor confidence and helped to keep the gears of credit moving. Corporate loans and various insurance products that back commercial debt are now more affordable and accessible. They are letting business continue to function and keep the U.S. economy on track.
assets
The purchases helped drive up the value of these securities and thus drove down mortgage interest rates and helped financial markets. Program hasnt been a complete success because while it reduced the cost of mortgages, credit conditions remained tight and as a result the full affects of the program were not felt. The purchase of high quality assets created greater liquidity, as intended. The purchase of these high quality assets did improve the availability of credit available to homes and business, but the affect was not as large as the Fed had hoped- as credit conditions still remain relatively tight.
Wizard of Oz- Three clicks of those shoes and Dorothy went back to normality
Why reverse?
Risk associated with QE (Quantitative Easing)- could trigger higher inflation. Feds balance sheet expanded from from 6% of US GDP in September 2008 to 15% in March 2009. Uncontrolled expansion of money supply and inflation
Why reverse?
Risk associated with OMO Low interest-rate encourages risk-taking, drives up asset prices and risks double-dip recession.
TALF
High Risk premiums and a decrease in the funding from Asset Back Securities for consumer credit. TALF designed to increase credit availability and economic activity by issuing to consumers ABS at levels prior to the recession. After the recession, it is hoped that the ~$1 trillion currently available as lending will be gradually decreased when ABS interest rate spreads can cope at a normal rate by themselves.
Review
Many Experts believed Monetary Policy was the best way to combat the financial crisis Several Programs were used the help the economy recover Some were effective, others were less effective Caution must be taken during the recoveryunderlying factors may be important
Questions?
Discussion questions:
Thoughts on Monetary Policy measures: Good/Bad, would you have done differently? Too Soon? How can Fed combat double dip recession? Would same measures work? What are your experiences of the recession? How has it affected your community?
Thanks to:
VEPR and Mr. Thanh Princeton University Classmates of ECO301, Spring 2010, Princeton Alice Su