The Great Economists Milton Friedman1

Forward guidance

A tool that central banks use to tell the public about the likely future course of monetary policy

Negative interest rates

When interest rate is paid to borrowers rather than to lenders

When interest rates are negative …

Central banks typically charge commercial banks on their reserves as a form of non-traditional expansionary monetary policy, rather than crediting them.

Negative interest rates occur

During deep depressions. Is meant to boost spending

Macroprudential policy

Aims to eliminate or limit systemic risks to prevent crises or lessen their consequences, to reduce financial system sensitivity to shocks limiting the build-up of financial vulnerabilities

An example of macroprudential policy

Higher capital charge to banks that pose more risk to the system

The main unconventional policy

Quantitative easing

UBI system

A social welfare proposal in which all citizens of a given population regularly receive a minimum income in the form of an unconditional transfer payment, without a means test or need to perform work

Negative income tax

A system that reserves the direction in which tax is paid for incomes below a certain level; in other words, earners above that level pay money to the state while earners below it receive money

Flat tax

When all taxable income is subject to the same tax rate, regardless of income level or assets

The stock market crash in 1929 was partly the result of

The Fed’s actions in 1928

The stock market has risen sharply at the back end of the 1920s’, causing the Fed to …. The governor of the influential New York Fed, Benjamin Strong, had strong reservations about using monetary policy to constrain the boom, but died in October 1928. His death created ….

Implement a deliberate tightening of policy in the spring of 1928 to curb speculation on Wall Street … A leadership vacuum

In September 1931 a wave of speculative attacks on Sterling had forced Great Britain to …. Speculators thought the economy was weak, so the currency should weaken too, which was not possible, since …. They sold off sterling, which meant the British government needed to …. That was considered too expensive, so Britain abandoned the gold standard. As speculators turned their attack towards the USA, the Fed was found to …. They tightened monetary policy between August 1931 and January 1932 to stem the outflow of gold as international investors ….

Get rid of the Gold standard … It was fixed to a set amount against gold … Use its gold reserves to maintain the value of the currency … Raise interest rates to make buying the dollar more attractive … Liquidated their dollar deposits

There was also a stigma attached to accessing the Fed’s discount window facilities, which allowed financial institutions … in case it might ignite a run on their deposits.

Access to emergency funding from the central bank in times of stress as banks did not want to advertise their vulnerability

It was widely believed that FDR would devalue the dollar or leave the gold standard altogether. It was costly to …, especially when the economy was in serious trouble. This encouraged the …, putting further pressure on the banking system as dollar deposits were withdrawn.

Maintain the currency peg to gold … Large scale conversion of dollars into gold

The Great Contraction

The recessionary period from 1929 until 1933, the early years of the Great Depression

The 1933 and 1935 Banking Acts introduced changes to the Fed Reserve System to enhance the ability of the Fed to stabilize the banking system. The measures included extending the ability of the Federal Reserve to make easily lend money based on receiving collateral, including to non-financial firms; the Glass-Steagall Act, resulting in the separation of commercial and investment banking functions; regulation of deposit interest rates; and strict limits on entry to the market. Also important was the creation of … in 1933 to stem the problem of ruinous bank runs. The FDIC remains in place today and guarantees that depositors won’t lose their money (currently up to …$) if a bank goes under… The Fed caused the crisis turning a stock market crash into a full-blown depression by failing to pump sufficient liquidity into the economy to support the banks. Instead, they allowed ….

The Federal Deposit Insurance Corporation (FDIC) … 250 000 … Runs on bank deposits to proceed relatively unchecked, resulting in bank failures and a severe deflation in output and prices

Like the Great Depression, the recent financial crisis was preceded by an asset price boom, but this time ….

Centred in the housing market rather than the stock exchange

The Banking sector had, or so it thought, found a way to ….

Mitigate the increased riskiness of lending

The collapse in house prices in 2007 triggered massive …. Homeowners with negative equity walked away from their properties. It meant that the originators of mortgages, or those who had bought mortgage-backed securities, found themselves with assets worth less than their liabilities. As a result of such negative influence, ….

Defaults in the US mortgage market … The banks were in trouble