AP Macroeconomic FED notes
Federal Reserve (Our central bank) created in 1913
12 districts ( very regional)
Each district has a predent that supplied stats etc.
The dollar shows the fed. Reserve district
San Francisco
Mineapolis
Kansas City
Dallas
Atlanta
St. Louis
Chicago
Atlanta
Cleveland
Philly
New York
Richmond
Boston
Center at buffalo, important for currency exchange near canada
Federal Reserve doesn’t control the exchange rate but allows it into the market.
Some states are split, and the presidents could me more lenient
FED and the banking
A check consists of a bank address or number, second set is the account, and when payed off another set of number is added.
Checks take time to process
The check goes to the NY FED and then sends it to the minneapolis (another fed bank) bank and then then talks to the aunt (other) bank
It used to take 10 business days
But now its 1-2 business days and even faster with apps
The FED undergoes 1 billion transactions a day
Only at the time of the computers does the nation finally feel national - Saroka
Every bank has its own divisions of banking and insurance
Can you be a bank and not be apart of the FED system? Yes but it will only work if you have an account at the bank and the same as the other person.
Credit cards use a similar system with the fed.
Paypal and Zell have their own money system
The banking system is unique in the Western world.
Banks do not have all there assets on file.
The FED looks at the banks and the money in the accounts constantly
Reserve Requirement, which is a percentage between 8 and 14% that the bank keeps that money in assets per account.
97% on paper, rest 3% goes into teller and atm machines
Fractional Banking allows banks to create more money.
Banking system creates money by using loans. Bank monetizes that signature on the loan documents.
Banks take 20% and the excess is called excess reserves and that money can be loaned out.
Banks do this everyday.
Banks create money by making loans
Bankruptcy occurs when loans collapse.
Monetary Policy
Money is like any other commodity-it has supply and demand concerns
The FED is responsible for maintaining/adjusting the supply of money through the FOMC and open market operations.
The New York District Bank actually executes the orders of FOMC.
Too Much or Too Little
Too much moey in the system (more than hat is needed) and that money chases goods, driving up prices (inflation).
Too Little money in the system (less than what is needed) and the economic engine stalls when companies cannot get loans (reccesion).
9/12/23
We cannot have panic at a bank run, because the bank doesn’t hold all your money, The FED had to intervene.
FOMC - New York has a permanent spot, and the other moemebers consist of fed presidents and governors that last 14 years.
Covid Relief Money printed extra money and increased inflation and driving up prices.
Inflation and Reccesion are polar opposites.
Economy Too Hot/Inflation
Symptoms
Demand-pull inflation spikes prices; people with jobs and good incoomes spend too much, too quickly.
Cost-push inflation input costs rise tremendously, consumers and business being pinche.
Fed Action-Cure
Fight fire with fire - Fed raises intrest rates
Consumers and business will cut back their borrowing and spending (demand will be cut)
Inventories of products will be growing, forcing compainces to cut prices to seel what they have.
Pressure by business to cut costs (wages are problematic)
New equilibrium point
Open Market Operations***
The fed sells bonds to the NYC bank; money moves from the nYC banks to the Fed reducing the supply of money.
Multiplier effect ripples throughout the US.
Economy Too Cold/Recession
Symptoms
Demand has dropped due to job cuts, fear, rising prices
Business must chop prices, stop producing, reducing inventories - jobs losses continue.
FED Action - Cure
Fed lowers interest rates
Consumer and Businesses will may increase there borrowing or spending
Increased investments by business mean more jobs oreaed and potentially better quality/priced products
Fed cannot overcome fear though
Pushing on a string
Open Market Operations***
The FED buys bonds to the NYC banks; money moves from the FED to the the NYC banks increasing the supply of money.
Multiplier effects ripples throughout the US.
Fed Funds Rate - rate that banks will charge each other for loans to satisfy overnight reserve requirements.
Discount rate - rate the FED charges to banks to meet reserve requirements. Can be collateralized. Lender of last resort.
Prime Rate- a business loan rate for best customers. Usually tracks 3 to 3.5% higher than the FED Funds rate, but is not regulated by the FED.
On october 1, the treasury department resets prices on interested rates and bonds. There called treasury bonds or savings bonds.
The system is broken
A long process, no one event triggered it
Not a casula link chain that could be easily terminated by removing one link
Government policies made matters worsee as well as created some of the conditions of the nightmare.
lots of business fingers to point the blame, few points at themselves.
I. Asset Bubbles
I.A Asset Bubble Defined
Takeoff (Stealth Phase),
first step off (Awareness phase),
media attention, enthusiasm, Public, greed, delusion (mania phase),
new Paradigm III, denial, bull trap, return to normal, fear, capitualuation, despair, return to mean (Blowoff Phase)
Assets are only worth how much someone is willing to pay for it.
I. B.1 Past Asset Bubbles - Real Estate
Ex, Houston, Texas
Year: 1981-5 Boom
Year: 1987 Bust
Consequence:
S & L Crisis of mid 1980’s
I.B.2 Past Asset Bubbles - Tech Stocks
Y2K
internet
Q3 and Q4 1999 reports showed the economy 7% growth
Stock investing made easier.
Consequences
Wealth effect contraction starts in march 200 leads to March 2001 recession.
The rise and fall of AOL
Aol goes public, valued at 61.8 million
Media draws attention
Peope buy the stock and reach market cap
Slowly collapses
I.B.3 Past Asset Bubble - homes
Prices rising, then goes down, bubble burst
Not everyone deserves to have a house.
Consequences
Inventories of new homes exceed rational demand, so the subprime lending market convinces people to trade up even though they cannot afford to. Supply exceeds demand, prices drop, wealth effects contraction continues price slides. Mortgages are underwater or in foreclosure
paper wealth contraction also impacts impulse spending like cars, vacations, and big tickets.
II.A Dangers of Subprime
NINJA loans, confusing terms, and commissions sales brokers mean many who should never have bought houses do. May buy up when they should not.
ARMS- many people are maxed out so when rates ticked up in October 2007 a flood of people were forced into short sells. Many could not recover enough to pay off their mortgages (Underwater). Many houses added to the inventory collapsing prices. Construction halts.
II.B CDO, MBS, CDS, and GSE
Most mortgages are boring. they are sold to FREDDIE and FANNY as CDOs (collateralized debt obligations).
The bank received instant cash to go lending again
Freddie and Fanny repackage them as MBS (mortgage-backed securities)
Houses have intrinsic value, so they are used as collateral. Houses have traditionally gone up steadily in price, but the 2000-2007 run in prices was nuts (100% or more in that time) so Goldman Sachs, et al, wrote a lot of backed securities (MBS) (bonds) which further increased the pool.
Major banks like Wachovia, Bank of America, and Citi, as well as the brokerage banks like Goldman Sacks, Bear Steam, and Lehman brothers, brought and sold these instruments
some of these bundles were poor quality
There are credit agencies which tells you if the credit is accurate
II.C.2 Send in the clowns
a. AIG writes insurance policies which will pay off the CDO/MBS in the event of a default…but housing will never default, right?
b. AIG suffered from a liquidity crisis when its credit ratings were downgraded below “AA” levels in September 2008. The FED 9/16/08 created an $85 billion credit facility to enable the comapny to meet their CDOs and CDSs.
c. The FED and the US treasury by 5/09 had increased the potential finnacial support to AIL, with the support of an investment of as much as $70 billion a $60 billion credit line and $52.5 billion to buy mortgage-based assets owned or guaranteed by AIG, increasing the total amount available to as much as $182.5.billion. Taxpayers Beware!
The bobble heads
III.A. The Bush Panic 2008
First Time $7500 HomeBuyters Tax credit (a 15-year interest-free loan payable against future tax returns from 2019 forward).
TARP- troubled Assets Repurchase Program. US Gov’t would purchase bad MNS/CDOs and get them off the books of banks, improving thier liquidity. Cost to taxpayers was initially estimated to be 4300B, but as of 12/10 Treasury Secretary
Congress authorized $700 B dolloars
Some money went to Gm, Chryslers, and we now find out foriegn central banks, foriegn private banks
US government too equity positions in these companies and this could be bought back layer by selling assests. (Gmsells of Hummer).
Repub. pres canditate John Mcain suspened his campaign to work on the bailit. Conservative Republicans (future tea party) blasts him.
In theory, the government could make a profit if they buy the MBs for less than fae value and seel them when markts heal for higher prices. pls when companies seell of their piexes, paybacks were accelrated
III.B.The great Recession
Pro-cyclical policie, when taxes are down, you either cut programs to balence budget or rasies takes to keep existing programs.. both makes the recession WORSE.
Counter-cyclical policies- blow the budget deficit even more by Stimulating the economy through deficit spending (cute way of saying borrow money from the Chinese).
III.C The Obama Panic 2009
American recovery and reinvestment Acct of 2009
passed along party lines
Signed fe 17, 2009
Debatable impacts
Shovel ready
Keynassian macroeconmic model
Demand Side stimulation
Did that (and Obamacare) lead to the dramatic congressional shit in 2010.
III.C. The FED’s panic 2008
quantitative easing-when should it be considered?
in econmoics when the monatary demand is h
Central banks can add money to their mbalence sheets at will (fiat power). T
Quantitative Easing- Criticism
a. Japan tried it to end their “lost decade” with no appreciable results
b. dollar is devalued in its relation with other currencies that have not been given economic steroids. Weak dollar has consequences
c. can you say Weimar Germany?
(The FED put money into the banking system but not into the hands of the consumers like stimulus checks)
6/27/07 - no excess reserves in the system
no hyperinflation because liquid toxic assets are purchased from banks, expanding their reserves. Whether they lend them out is another story, but we now know they did not.
IV. Who’s watching over us
Marxs
Born into upper middle class
University educated Ph D
Never worked a hard day in his life
IV.A The administration
Bush
The president of the US
son of oil-man, CIA Dictator, G.W.H. Bush
graduated Yale (his father’s alma mater) with a 2.35 GPA, yet got into Harvard Business School, and recieved MBA after failing to get into U of Texas Law School
Bankrupted 3 companies even after being bailed out by friends/family
Secretary of the Treasury
Henry Paulson
joined Goldman Sachs in 1974
70 trips to china
Big AL
Helicopter ben
V.A.2. lingering Problems-Bush Tax Cuts
two sets of tax cuts - ten year lifespan
no corresponding cuts in spending
two wars
massive deficit spending
debt crisis
V.A.3.a. Soverign Debt
V.A.3.e 2011 Credit Downgrade
credit downgrades means there exists a great chance of default. That makes the cost of borrowing greater as higher risk necessitates higher return on investment
“full faith and Credit” not enough
V B.2. Businesses Waiting
companies hold off from improvements etc.
Caterpillar reported 10.7 billion in cash
Microsoft reported $52 billion in cash
J&J - $30 billion in cash
Apple - $257 billion in cash
social security spending will soar eventually
medicare is very concerning.
Demographics no help
immigrant communities are above 1 and white people below 1.
Japan (xenophobia towards immigration) and western Europe are in greater peril.
V.E. I Can’t retire at 55
cash strapped comanies and municipalities do not want to spend money on early retirement packages
laws forece public employees to work to 62-65 to qualify for full benefits
poor returns on investment porftolios leave people with no choice but to work longer
chronic unemployment for the recent college graduates.
VI.A. Wall Street does not equal patriotism