Monetary Policy: Contemporary Issues - II ECO 473 - Dr. Dennis Foster W.A. Franke College of Business

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

What did the Fed do? Quantitative Easing. Raise the money supply Buy Treasuries. Buy MBS. Boost short term lending. Raise the money supply Lower interest rates.

5.25% 2.41% Federal Funds rate of interest, 2004 to 2019 4/2019 2.41% IV. What has the Fed accomplished?

The Fed Charts New Territory – 2008 to 4/2019 $3.9 tr Assets $2.15 tr $1.58 tr

The Fed Charts New Territory – 2008 to 4/2019 $3.9 tr Liabilities $1.68 tr $1.57 tr

Housing Revisited Home sales, 1999 to 2015 March 2019 5.21 mill.

Housing Revisited Median home prices, 1999 to 2015 March 2019 $259,400

The Case of the Missing Inflation

V. The problem with policy 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? 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?

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

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 No bank panics. No convoluted regulation. No inflation. No discretionary monetary policy. No monetizing of federal gov’t. debt. An end to the business cycle!!

A Tale of Four Recoveries

The New Normal?

What if … ? GDP (2015) = $23.5 tr. vs. $16.4 tr. 3.8% GDP (2015) = $23.5 tr. vs. $16.4 tr. 1990 - 2015 net gain = $59 tr.

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.

Get on the mailing list for Fall 2019 – dennis.foster@nau.edu

ECO 481: Public Choice Theory The W.A. Franke College of Business Northern Arizona University Spring 2020 ECO 481: Public Choice Theory Why Government Fails Dr. Dennis Foster FCB #308

Monetary Policy: Contemporary Issues - II ECO 473 - Dr. Dennis Foster W.A. Franke College of Business