Econ 2133 1st Edition Lecture 15Outline of Current LectureWhat happens to the balance sheet when an economic crisis occurs?Expansionary Fiscal Policy during Financial crisesTools of Fiscal Policy (%RR & Discount Window)Current LectureAugust 9th 2007 – BNP suspended mortgaged back securities Great Depression peaked at 25% of unemployment? Most recent crisis (great Recession) intersects with number “900B” – fed had balance sheet of 900 Billiondollars- Since this, balance sheet has gone up by 5 .. Fed has quintupled balance sheet by buying a helping of assets (basically houses via mortgaged backed securities worth 2 Trillion dollars) - BUT WHY? (security = borrowing and lending money, some debt tool is being used aka mortgage backed bonds) - Bought a boat load of US Treasury Securities, why were they even in market in first place? - Because fed govt has debts in past so they issue securities in order to borrow money- Treasury securities are part of our national debt which makes up about 2.5 Trillion $/ 18.5 Trillion $ debt - Fed went from 900B$ to 2.5T$ (expansionary monetary policy)- Monetary base rises, interest rates fall, and money supply risesExpansionary Fiscal Policy (in recessions and when there are financial crises)- September 15th 2008- Want to increase bank reserves to increase money supply (Ms) to decrease interest rates to increase credit availability and therefore overall spending! - Fed funds rate = .25% and dropped it 5% points- The interest banks pay one another for short term reserve loans - Cannot get sued if you don’t default on mortgage, don’t even have to go to Bankruptcy Courtin US- Japanese housing bubble in 80s- Most expensive real estate in world, especially in Tokyo- People were taking out 100 year mortgages- Canada (no financial or housing crisis) because they have recourse loans- You take out mortgage and if you default, you don’t just walk away from it. Go to court and get sued for difference because mortgages are recourse loans there Tools of Fiscal Policy1. Choose Percent of Required Reserves (RR%) -- Decreasing RR% = expansionary fiscal policy because it gives banks more excess reserves andless required reserves Increases Money Multiplier = 1/RR%Paucity of changes: changing reserve requirement percentageThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1992: was 12% and decreased to 10% 2. Discount Window/ 13-3 Facility lending (section 13 part 3 of Federal Reserve act of 1913 that outlines what the fed can actually do)- “in exigent circumstances (in emergency)- Discount window: the fed lending to banks pay the “discount rate” Stigma with borrowing from discount window; if you go to fed and asked to borrow money it’s going to get tense. You have marked yourself, it’s like the people who go to rehab all coked out like crazy meth addicts. So that’s what it’s like when you go ask the fed for money. - Term Auction Facility “TAF” December 12th 2007 until early 2010: discount window without the stigma - Term Asset Lending Facility “TALF”: markets were crashing so fed stepped in and specifically set up credit cards, student loans, home equity, and auto