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
VII
Outlook for the economy

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. Fed Lending Programs: 2008-2010
See Appendix B for details

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

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

17. Housing Revisited
Home sales, 1999 to 2015

18. The Fed charts new territory.
$4 tr.
Monetary Base
Excess Reserves
$2.6 tr.
V. The problem with policy
$2.5 tr.
Fed-held US
Treasuries
$1.7 tr.
Fed-held
MBS

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

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

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

22. 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?

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
2016 March 5%

25. 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.

26. 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!!

27. 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.

28. 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.

29. VII. Outlook for the economy
What is the Outlook?
Interest rates will stay low. Yellen hints at increases. Banks awash in cash Economic performance is weak.
Inflation is still a looming danger. Where will all the money go? Can the Fed stop rising inflationary expectations?
VII. Outlook for the economy
Best case scenario? Economy is sluggish, Ur stagnant, and and banks hold massive XS reserves. Another year (or 2?) on the knife edge.
Worst case scenario? Economy surges, banks lending, and dramatic inflation. Recession within 3 years???

30. Get on the mailing list for Fall 2016 – dennis.foster@nau.edu

31. ECO 481: Public Choice Theory
The W.A. Franke College of Business Northern Arizona University Spring 2017
ECO 481:
Public Choice Theory
Why Government Fails
Dr. Dennis Foster
FCB #308

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

33. Appendix A: Stock prices collapse of IndyMac, WaMu, Lehman Bros.

34. Appendix B: Fed Lending Programs
Term Auction Credit

35. Appendix B: Fed Lending Programs
Primary Dealer Credit

36. Appendix B: Fed Lending Programs
Commercial Paper MMMF

37. Asset-backed Securities
Appendix B: Fed Lending Programs
Asset-backed Securities

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