Econ110BW11 - Lec 26A- GRol

Econ110BW11 - Lec 26A- GRol - Macroeconomics B Econ 110B,...

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Unformatted text preview: Macroeconomics B Econ 110B, Winter 2011 Prof. Giacomo Rondina Lecture 26 Announcements Reminder: CAPE online evaluations. Review Session ahead of Final Exam Saturday, March 12 th , 10:00am to 11:50am, Center Hall 113 2 Depressions and Slumps (Ch. 22) Depressions and Slumps: the Great Recession (2008 2010) What triggered the recession? What made it so deep and long lasting (unemployment)? How did monetary policy react? How about fiscal policy? 3 The Great Recession (2008 2010) The Federal Reserve How does the Fed control the lending behavior of the banks? In normal times: Reserve Requirements Banks must keep some cash to satisfy the requests of depositors. Discount Window Any bank is allowed to ask for a loan directly at the Fed at the Discount Rate Open Market Operations The Fed lends money to banks for short period of times by asking Treasury Bills as Collaterals . This lending can be renewed, increased or decreased overall. The Fed funds rate is affected by Open Market Operations 4 The Great Recession (2008 2010) The Federal Reserve The Feds Balance Sheet in Normal Times (Before August 2007) Assets Liabilities Treasury Bills: $800B Notes In Circulation: $800B 0, , d B M B P i > > d B B P i < < 0, , M B P i < < 5 The Great Recession (2008 2010) How does the Fed control the lending behavior of banks? Banks with funds invest in Treasury Bill ( i ) or Libor ( i LIBOR ) TED = i LIBOR i Normal Times: TED low and constant. Standard Monetary Policy Works. 6 Financial Crisis: TED volatile and high. Standard Monetary Policy Does not Work. The Great Recession (2008 2010) Monetary Policy Response to the Financial Crisis of 2007 2008 Federal Funds Rate vs Corporate Bond Yield Interest Rate Policy not effective to reduce spike in borrowing costs. Policymakers needed to come up with a something else. 7 The Great Recession (2008 2010) Towards New Banking: Securitization ssets abilities Major Banks, Investment Banks (Bear Sterns) Assets Liabilities Issued Stocks (Capital) Assets back Stock Market Tanked by Houses as Collateral $ ?????????? Toxic Assets Loans from other Banks Stocks of other Banks No Bank Wanted to Lend Anymore $ ?????????? 8 The Great Recession (2008 2010) Policy Response to the Financial Crisis of 2007 2008 Treasury: TARP (Troubled Assets Relief Program) easury owns equity in private financial institutions Treasury owns equity in private financial institutions. Fed: Direct Purchase of Troubled Assets d holds MBS and other risky securities. Fed holds MBS and other risky securities....
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Econ110BW11 - Lec 26A- GRol - Macroeconomics B Econ 110B,...

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