1. Monetary Policy: Contemporary Issues
ECO Dr. Dennis Foster
W.A. Franke College of Business

2. Monetary Policy: Contemporary Issues
Heading into crisis II
The failures
III
Fed inaction & action IV
What has the Fed accomplished? V
The problem with policy VI
The Austrians & rethinking policy

3. What does the Fed Want?
A healthy & strong economy with low unemployment and low inflation.
I. Heading into crisis
Policy? Stimulate spending by reducing interest rates.
Why? They are Keynesians.
Effect? Creates housing boom.

4. Federal Funds rate of interest, 1995 to 2004

5. 30 year mortgage rate, 1995 to 2004

6. Median home prices, 1999 to 2006

7. Home sales, 1999 to 2006
Sept. 2005

8. The Bear Stearns Story $133.20 - 52 week high prior to collapse.
Lost billions in collapsing subprime market; slowly recovering.
March Assets/equity = 35
Lots of assets in MBS.
Spring 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.
II. The failures
$400 b.
Assets

9. 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?

10. The Three Failures: IndyMac WaMu Lehman
Spun off from Countrywide.
Not a “mac”
Overleveraged on “Alt A” loans.
WaMu
Shut down 100’s of offices
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
$32 b.
Assets
$300 b.
Assets
$640 b.
Assets

11. Did the Fed see this coming?
III. Fed inaction & action

12. Did the Fed see this coming?
III. Fed inaction & action
What did the Fed do?
Cut interest rates.
Lend to everyone.
Quantitative Easing.

13. Federal Funds rate of interest, 2004 to 2015
IV. What has the Fed accomplished?

14. Housing Revisited
30 year mortgage rate, 2004 to 2015

15. Housing Revisited
Median home prices, 1999 to 2015
190,000

16. Housing Revisited
Home sales, 1999 to 2015

17. 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

18. The Quantitative Easing Programs
+649%
+178%
+44%

19. What is the exit strategy?
The FED will have two choices:
Continue policy  hyperinflation
Halt policy  recession
V. The problem with policy
Or Wage/Price controls?

20. A Tale of Four Recoveries +25 Q
+33%
+24%
+18%
+14%

21. The Unemployment Rate – 1980-2015
Oct. ‘ %
Dec. ‘ %
June ‘ %
June ‘ %

22. Tracking Prices and Inflation – 1995 to 2015
3rd Q 2015 yr-to-yr +.13%

23. VI. The Austrians & 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!!
VI. The Austrians & rethinking policy

24. 2008
1981
1920
2015 Nov. 5%

25. What if … ? GDP (2015) = $23.5 tr. vs. $16.4 tr.
3.8%
GDP (2015) = $23.5 tr. vs. $16.4 tr.
net gain = $59 tr.

26. Let bad firms/banks go bankrupt. Abolish Fannie & Freddie.
We don’t lose real resources!!!!!
Abolish Fannie & Freddie.
End the Fed.
End the government monopoly on money.

27. The Trouble With Economic Statistics
Poorly defined … poverty, inequality, price level
Imprecise … discrepancy statistic for trade
Flawed … include G in GDP? GDE better?
Misleading … trade deficits bad? WWII prosperity?
Why? Data used to justify government policies.
Why? Market can’t fix problems; government can.
Who tells us this? Bureaucracy, politicians, elected officials.
“We must carefully distinguish between what we think we know and what we really do and can know.” -O.M.
What is the legitimate role of government?

28. Get on the mailing list for Spring 2016 – dennis.foster@nau.edu

29. ECO 481: Public Choice Theory
The W.A. Franke College of Business Northern Arizona University Spring 2016
ECO 481:
Public Choice Theory
Why Government Fails
Dr. Dennis Foster
FCB #208

30. Monetary Policy: Contemporary Issues
ECO Dr. Dennis Foster
W.A. Franke College of Business