Assignment 1: Privatizing the U.S. Money Supply

Would it be possible to privatize the money supply in the United States completely?  In doing so, what would be the primary obstacle to overcome in implementing such a policy?

By Thursday, February 1, 2013, post your initial discussion response in the M4: Assignment 1 Discussion Area. By Wednesday, February 6, 2013,

 

 Assignment 2: The Multiplier Effect

1. Go to “FRB: Press Release—FOMC statement—December 16, 2009.”
2.  You should now find a press release from the Board of Governors of the Federal Reserve System, dated December 16, 2009, which discusses the decisions of the Federal Open Market Committee (FOMC) for that date.

This release also states that the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. Additionally, the release states that the FOMC has decided to gradually reduce “the pace” of such Fed purchases. Discuss why you believe that the FOMC has made such a decision, and explain the consequences of such a decision on the economy.

In your answer, discuss the Federal Reserve’s use of open-market operations to influence the money supply and the respective consequences of such actions. Include a discussion of the money multiplier effect in your response. Justify your conclusions and provide appropriate examples.

Using Microsoft Word, submit your responses in the form of a short paper ( 2 pages).

By Monday, February 4, 2013

 

I.              How does open market operation (OMO) affect economic activity:

OMO refers to the sale /purchase of securities (government) by the FED to other banks, institutional buyers and financial institutions in order to influence the total money circulating in the system. Ina recession when the govt wants consumers to spend more it purchases these securities. This releases more funds into the coffers of these institutions, which allows them to use these to extend more credit and raise consumption and investments. the opposite happens in a boom period. When the government wants to reduce spending and arrest rising prices it takes away funds by offering to sell its own securities. Financial institutions buys these  and reduce the amount left with them for credit purposes. Since the FOMC is the policy making branch of the FED it is responsible for any decisions on sale/purchase of securities as well as the price at which these transactions happen. The article is a part of that decision making. It outlines the decisions taken and elucidates the reasons behind the former. Therefore the influence on the economy of OMO is via changes in money supply.

II.             reasons for the FOMC decision

recent data has been encouraging on a front of fronts, which signalled a recovery from the financial meltdown of 2009. But this recovery was slow compared to most recoveries from previous recessions. Signs of a recovery include:

·          In the residential real estate sector, home sales and construction were rising, from their earlier low levels-  in some areas prices had even risen.

·          Inventories were reducing at slower rates, which meant greater confidence in consumption spending by firms.

·          The trend for consumer spending showed an uptrend.

·          There was no rise in inflation, so price rise was subdued.

·          Growth in foreign countries were was on an upswing, which meant greater demand for US exports-a good omen for growth.

However all data was not so positive and bullish on recovery. There remained certain areas of concern:

·       Unemployment was still high and labour markets were weak.

·       Bank credit did not rise, which meant that either banks don’t have funds or consumers are not picking up loans.-this is a not conducive to a recovery which must be based on rising credit demand that fuels consumption and fresh investments.

·       Business sentiment was still weak and did not encourage fresh investments. Sentiments affect producers, decisions about capacity expansion, labour recruitment new businesses.

·       Commercial real estate was not picking up. This is critical as a rise in demand for commercial space shows greater confidence in economic conditions that prompt new businesses to be set up. 

These mixed data were the motivation for the decision to continue with purchases of securities. Since the signs of recovery are there the pace of purchases has been reduced. There was a consensus that govt support in terms of pumping money in the economy is still needed to strengthen the initial signs of recovery

III.            Consequences of FOMC actions:

The estimates and expectations have come true in some respects. Most recent data show a fall in unemployment in USA. However we must understand that OMO have a short, medium and long term effects. Some effects are there to be seen but most of such effects take time to show in concrete data terms. The collection, compilation of data is time consuming. It is clear that USA is recovering from the recession- things are improving . the FOMC’s actions have been helpful as witnessed in the EU support o Greece. The govt’s monetary support has been instrumental in the recovery. This support translates into the actions of the FOMC and provide a signal that the govt is ready to take any action to force an economic recovery.