Range of
Intervention Mechanisms
The list is organized by category
to emphasize the broad range of interventions, mechanisms, programs,
and policy changes. The media, politicians, and commentators have a
tendency to simply respond to the most recent proposal or action with
some reference to previous contrasting or comparable actions. This
loses the wide-angle view of the full array of interventions and leaves
an impression of a scatter shot policy response to the crisis. In fact,
the administration's programs, while often experimental and
evolving, are actually efforts to consciously bring every potentially
effecitve economic mechanism into play.
As summarized in the Economics
Primer web page on this
site there are fundamentally two types of policies the government can
implement to try to influence the level of economic activity: Monetary
policy and Fiscal policy. In some ways all of the actions taken by the
Bush and Obama administrations can be placed in one of these
categories.
However, due to the fact that many of the interventions taken are
uncommon, only implemented or even proposed during major crises (for
example nationalization) and due to the fact that many of the
interventions are experimental, evolving, and responding to entirely
new circumstances (for example credit default swaps) I think it is more
useful to separate out traditional Monetary and Fiscal policy responses
from the more unusual financial and regulatory interventions.
Additionally, given the nature of the problems in the financial and
housing sectors (for example, lack of proper risk assessment, lack of
transparency, and fraud in the case of Madoff Securities) and due to
the scale of the losses and interconnected nature of the financial
instruments the traditional Monetary and Fiscal responses have proven
to be or are likely to be relatively weak or ineffective.
Monetary Policy (and Federal
Reserve actions)
The Federal Reserve Bank (the Fed)
is simultaneously a private bank that holds deposits and extends loans
to its member banks and a quasi-federal government agency with
authority to regulate the banking system and to manage the nation's
money supply. The money supply is managed to influence interest rates
and thereby attempt to manage the level of borrowing, investment, and
inflation. The money the Fed controls is not government money. It
is money deposited in it by private member banks. The government's
money is controlled by the U.S. Treasury (that's why it is called the
Treasury all the way back to feudal times).
It is the Fed, not the Treasury, that creates money. Most people think
that money is the dollar bills and coins in their purses and pockets.
However, currency and coin only account for about 11% of all the
money in the economy. The rest of the money is essentially electronic
records of transactions: deposits, lending, credit card balances,
certificates of deposits, et cetera. The banking system automatically
creates new money every time a new deposit and loan are made. The Fed
can also create money by simply electronically adding money into its
reserves available to banks to borrow.
Interest
Rate Adjustments
From September 2007 to December 2008 the Federal Reserve cut the Federal Funds Rate
from 5.25 percent to a range of between .25 percent and 0.00
percent. The Federal Funds rate is the interest rate that banks with
deposits in the Federal Reserve Bank are allowed to charge each other
for overnight loans to keep their accounts in balance.
Simultaneously, the Federal
Reserve similarly cut the Prime Rate to
.50 percent. the Prime Rate is the interest rate that the Fed loans
money to its strongest depositor banks.
These are an extremely
aggressive actions given the rapid rate of decline of the interest
rates and the fact that it cannot go any lower than 0.00 percent. After
these actions the Federal Reserve cannot stimulate lending via interest
rate adjustments. This mechanism is now entirely exhausted.
Increases in
Liquidity
Because the Fed charges higher
rates to lend money than the banks are allowed to charge each other and
because borrowing from the Fed is often seen as a sign of weakness, the
Fed is usually a secondary lender to banks. The primary lenders are
other banks. In other words, normally the volume of money that banks
borrow from each other is far greater than the amount of money they
borrow from the Fed. However, because banks started to distrust each
other and inter-bank lending began to freeze up on 2008, the Federal
Reserve has become the primary lender to banks.
From late 2007 to late 2008 the Federal Reserve increased the amount of
money available to lend to banks and extended the loan period to 84
days from 24 hours. By the end of 2008 the Federal
Reserve had made available $900 billion to banks at the above reduced
interest rate (.5 percent for prime). This was a major expansion of
liquidity (expansion of the money supply), the amount of money
available to circulate in the economy.
Foreign
Currency Swaps
Since 1962 the Federal Reserve bank
coordinates currency swaps with Central banks of
other major economies. These swaps exchange dollars for foreign
currencies to allow the Central Banks in foreign countries to supply
their economy with dollars by lending the dollars to banks within their
countries. This allows the foreign banks to fund purchases of American
products or payments to American firms. Without these swaps the foreign
banks and foreign companies in need of dollars would borrow the dollars
or exchange them in the private markets. But because the world economy is in crisis these markets
have also dried up. So, the foreign Central Banks, like the Fed, are
becoming the primary source of such funds. These swaps are another
mechanism that the Fed can use to expand the money supply.
By the end of 2008, the Fed had
exchanged an
additional $500 billion to 14 foreign Central Banks essentially
expanding the supply of dollars by $500 billion.
Non-Traditional (even Unprecedented)
Federal Reserve Actions
The magnitude and diversity of
nontraditional lending programs and
initiatives developed over the past year are unprecedented in Fed
history.
- Statement from the Federal Reserve
Bank of Minneapolis
Under the coordination of the U.S.
Treasury the Fed funded ($30 billion) the forced the acquisition of
Bear Stearns by JP Morgan Chase. With this action the Fed began to use
a rarely implemented intervention - lending money to enterprises that
were neither depositors in the Federal Reserve Banking System, nor even
commercial banks. Since then, it has expanded this mechanism to extend
loans to a wide range of "non-traditional borrowers" such
as AIG, money market mutual funds,
commercial paper (private bonds), and others. Simply give an idea of
the breadth of this intervention the following are the non-traditional
lending programs ("facilities"
in Fed terms) introduced
by the Fed through 2008 :
- Term Securities Lending
Facilities (TSLF)
- American International Group
(AIG)
- Asset-Backed Money Market
Mutual Fund Liquidity Facility (AMLF)
- Commercial Paper Funding
Facility (CPFF)
- Money Market Investor Funding
Facility (MMIFF)
- Term-Asset Backed
Securities Loan Facilty (TALK)
By the end of 2008 these
non-traditional credit programs amounted to approximately $500 billion
in new money created for the economy. This is in addition to the
$900 billion identified above. With that expanded credit to the banking
system and the currency
swaps the Fed had more than doubled
(actually almost tripled) the most credit it had ever extended in
its history and it did this in a single year from August 2007 to
December 2008. The previous record for expansion of credit was a 60
percent increase from 1933 to 1934 during the deepest part of the Great
Depression and under Franklin D. Roosevelts' New Deal.
Each of the actions
summarized above range from extraordinary to unprecedented, in the
history of the Federal Reserve. At this point it is unclear how much
more the Fed can do. Interest rate policy is exhausted, the monetary
policy of the last 30 years is also ineffective, and there is limit to
how much the Fed can create money without creating ;arge scale
devaluation of the currency. (However, interestingly there is far less
threat of thos occuring than what was expected, because the global
economy is in such bad shape that there is high demand for U.S.
Treasury bonds worldwide, because the U.S. economy and government
remain the most stable and trustworthy in the world.) In general, the
Fed is seen as nearing the end of its arsenal.
The Fed created a new web
site
to provide info. specifically on its actions to address the financial
crisis. This site provides the complete and updated interventions the
Fed has engaged in: Credit and
Liquidity Programs and the Balance Sheet. It's daunting, but it is all
there.
Fiscal
Policy
Fiscal policy focuses
on
managing the level of taxation and government
spending in order to influence the level of national income and
spending. Fiscal policy intended to stimulate the economy out of a
recession includes any combination of increasing government spending
and cutting taxes. This type of fiscal policy (expansionary) will
always generate governemnt deficit spending and reduce a surplus or
expand the national debt. Fiscal policy intended to avoid or reduce
inflation uses the opposite combination of mechanisms: cutting
government spending and increasing taxes. This type of fiscal policy
(contractionary) will always run a government surplus and pay down the
national debt.
The goal of managing fiscal policy
long term is to balance the
government's budget over the business cycle (through repeated periods
of growth and recession) NOT annually. In order for fiscal policy to be
effective overtime and not be overly disruptive the government must
borrow money and spend it, that is it must run deficits, during
recessions, and run surpluses to pay down the debt during
expansions. Fiscal policy as a tool to stabilize and even revive the
economy was first developed by John Maynard Keynes.
NEW! 10/09 American
Recovery and Reinvestment Act of
2009 (Obama's $787
Economic Stimulus Package)
The Recovery Act was passed by Congress and signed into law by
President Obama on Feb. 17, 2009. The purpose of the $787 billion
Recovery package is to jump-start the economy to create and
save
jobs. The Act specifies appropriations for a wide range of federal
programs, and increases or extends certain benefits under Medicaid,
unemployment compensation, and nutrition assistance programs. The
legislation also reduces individual and corporate income tax
collections, and makes a variety of other changes to tax laws.
Long-term investment goals include:
- Beginning to computerize health records to reduce medical errors
and save on health-care costs
- Investing in the domestic renewable energy industry
- Weatherizing 75 percent of federal buildings and more than one
million homes
- Increasing college affordability for seven million
students by
funding the shortfall in Pell Grants, raising the maximum grant level
to $500, and providing a higher education tax cut to nearly four
million students
- Cutting taxes for 129 million working households by providing an
$800 Making Work Pay tax credit for qualified individuals
- Expanding the Child Tax Credit
For the first time eveer, the Obama Administration has created a web
page to report the status of an active government program. It is called
Recovery.gov. The following links will get you you various interesting
pages on the Recovery.gov web site.
Find the amount of money spent on
government Contracts, Grants, or Loans anywhere in the U.S. and its
territories. Find the reports for Eugene/Springfield by entering a
local zip code: 97405.
Budgets
2009 , 2010
Financial Interventions
As stated at the top of this
page most of what is outlined below could be included as Fiscal policy
or possibly Monetary policy for those programs that the Federal Reserve
is playing a role in. The general goal of all of the following programs
is to provide funding, under a wide range of arrangements to the
financial markets, from banks to non-banking financial institutions to
the auto industry to home oweners threatened with foreclosure.
Stock Purchases
TARP (Troubled Asset Relief Plan
aka Bank Bailouts)
- When the significance of financial crisis first became apparent in
the Fall of 2008 the Bush Administration proposed and Congress based
$700 Billion Bailout package. The goal of this program was to quickly
shore up banks and oher financial institutions that had lost money or
expected to lose money that they
had invested in the securities based upon the sub-prime mortgages. The
original plan that Treasury Secretary Paulson proposed was to buy
up these "toxic assets".
There was at least two problems with this plan. First, since the assets
were worth between nothing and some undetermined amount significantly
less than their face value the government risked paying way too much
for them and simply handing over taxpayer money to banks to cover their
loses. Even then it was likely to not be enough money.
The second problem was that this plan would not make the banks fully
healthy and trustworthy to investors since the money would only cover
losses and provide new money to loan.
So, Paulson (presumably convinced by Bernanke at the Fed) decided to
instead purchase prefered stock in the banks and financial
institutions. Buying stock would provide the banks with the infusion of
new money and protect taxpayer money because the Treasury would own
stock in the banks which it could sell to recoup some and hopefully all
of the money in the future. This is the $700 Biliion Troubled Asset
Relief Plan (TARP), better known as the Bank Bailout plan.
There was one problem and one complication with this approach. First,
the problem - it did nothing to remove the toxic assets from the banks.
This problem is still challenging the Obama administration 3 months
later, which just proposed a more complex version of the first solution
(The Public-Private Investment Program for Legacy Assets).
The complication that TARP raised was that by buying stock the federal
government was partially nationalizing the banking system. Since it was
prefered stock that the government purchased it would not be making any
management decisions, nonethless the federal government now owns
approximately $200 Billion worth of bank stock (as of April 2009).
The TARP funds were split into two $350 billion packets. The first was
distributed by the Bush administration before it left office. The
second $350 billion is being managed by the Obama's Treasury Secretary
Tim Geithner. This second bundle is being broken up and used several
different ways. For example, the some of the second bundle of TARP
funds is being used to pay for the purchases of stock and granting of
loans to GM and Chrysler (aka the
Auto Bailout Program).
Recipients of TARP Funds. This site lists the recipients of
TARP (Troubled Asset Relief Plan) funds. It is updated daily and
reported by the Wall Street Journal. The US government through the US
Treasury will
purchase up to $700 Billion in shares from approved banks operating in
the
United States. By buying shares in the banks, the US government
provides
an investment of funds and receives partial ownership of the banks. Note that the WSJ identifies the
list as "Participants
in Government Investment Plan".
The major recipients of TARP funds are:
Citigroup, Inc.
JPMorgan Chase & Co.
Wells Fargo & Co.
Bank of America Corp.
Goldman Sachs Group
Conservatorship, Receivership, Nationalization
Fannie
& Freddie
Bear-Stearns
AIG
(Loans and Loan Guarantees)
Home
Mortgage
Auto industry
Subsidized Purchase of Assets
Toxic
Assets: Public Private Investment Plan (mar. 24)
Regulatory
Changes
Regulatory Authority (mar. 25)
b
