What monetary policy actions have been taken during and since the financial crisis, and which ones were most helpful in improving the economy? Which actions might prove to have negative, unintended consequences? Paul Target interest rate lowered from 5.25% to .25% Has remained low ever since Began purchasing securities, increasing the Fed’s balance sheet to $4 trillion by end of 2013 Began tapering off monthly asset purchases Pledged to keep interest rates low as long as unemployment is above 6.5% and inflation is low QE1, QE2, almost QE3 buying securities to stabilize economy & curtail or stop the slide…much of the securities bought are mortage securities QE1,QE2 etc result in decreased interest income Decreased interest income results in less liquidity/spending within the economy With the benefit of hindsight, how would YOU have handled Bear Stearns, Lehman and AIG if you had been Fed Chairman at the time? Defend your position using more than ideology. Paul I believe AIG was the best model (paid back in full + an addl 22B) All 3 should have been given the same opportunity: create a credit vehicle to provide funds which would be repaid; firms can access only if they can provide collateral, which is to be created by the sale of assets they have Part of the financing agreement would freeze bonuses to execs What would YOU DO NOW to prepare for the next, inevitable, financial crisis to avoid another Lehman/AIG moment? Remember, the EMBA Class of 2017 is depending on you to get it right. Paul Make it clear that poorly understood or recognized investment models will not be eligible for bailout Make it clear that natural selection will take place…if a firm is undercollateralized and the gov’t will not realize a profit from a bailout, it will allow firm to fail Improve oversight as to credit availability so that credit is not easily obtained for high-risk, high-leverage investments See to it that inflation remains stable while unemployment decreases Structure policy such that liquidity is encouraged and flight to safety is less prolific Require banks to be better capitalized Monitor the system and make modifications such that junk-bonds are not allowed to be as prolific as they have become (17% pre-crisis; 25% now) Gradually raise interest rates to the extent inflation remains stable in order to discourage/balance out increased risk-taking by companies going after easily-available credit What do you anticipate will be the long-term effects of the Fed’s massive monetary accommodation, in combination with the substantial increase in government intrusion in the financial system and the economy? Paul For one, I believe one long-term effect has already been seen. Never before seen government intrusion has led to a much slower than expected recovery (i.e lower percentage than expected of jobs lost have been recovered). Long-term minimizing of interest rates may have us on track for a spike in inflation once they are raised again Lost value of the dollar Higher oil prices as a result of the decreased value of the dollar Slowed growth again because of higher oil prices
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