Discussion 1
The Federal Reserves were using practices that they haven't used since the Great Depression. “First, the Fed extended credit to nonbank financial firms, which was the first time since the Great Depression that entities outside of the Federal Reserve System could borrow directly from the Fed”(Amacher Pate 2012). They did this so that all the small firms didn't fall because of the economy. “The Fed also purchased assets and loans from firms deemed "too big to fail." The purchases of mortgage-backed securities, loans ranging from millions to billions to financial firms like American International Group, and guarantees of the assets of Citigroup and Bank of America were all seen as unconventional practices of the Fed”(Amacher Pate 2012). That way they would have the money to used to help stabilize their financial state.
To support the firms that the Federal Reserve thought was to big to fail, they passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. “On July 21, 2010, President Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act into law, which permanently raises the current standard maximum deposit insurance amount (SMDIA) to $250,000”(Amacher Pate 2012). This way when there will be less likely for the banks to be in a crisis because they would have more money to work with.
I think they did what they thought they had to do to keep the economy from collapsing. If everything started falling apart and they couldn't come up with a solution, they would have bigger problems to deal with than unconventional practices.
Amacher, R., Pate, J. 2012. Principles of Macroeconomics. San Diego, CA. Bridgepoint Education Inc.
The Federal Reserve was established to provide bank safety. Subsequently, the Federal Deposit Insurance Corporation (FDIC) was created to provide protection to bank depositors from bank failures. According to text, “it is important to allow unsuccessful firms to fail and leave the industry if the market system is to function effectively” (Amacher, 2012, p. 343). In response to the numerous bank failures, the FDIC implemented several changes. First, it mandated that all accounts that are not interest bearing to be insured in full. Banks were using these funds to issue high interest loans, while paying minimal interest to funds that were deposited. Next, the Federal Reserve System was divided into 12 districts. This method ensured that control of the banks was not consolidated at a national level. At this point, the Federal Reserve can also adjust the interest rates to encourage or discourage banks from lending money. Also, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. This was the response for organizations who were deemed “too big to fail.” This law required banks to have a high ratios of capital reserves, as well as reduce their penchant for risk tasking.
Travis
References
Amacher, R., Pate, J., (2012).Principles of Macroeconomics. San Diego.
Discussion 1The Federal Reserves were using practices that t.docx
1. Discussion 1
The Federal Reserves were using practices that they haven't
used since the Great Depression. “First, the Fed extended credit
to nonbank financial firms, which was the first time since the
Great Depression that entities outside of the Federal Reserve
System could borrow directly from the Fed”(Amacher Pate
2012). They did this so that all the small firms didn't fall
because of the economy. “The Fed also purchased assets and
loans from firms deemed "too big to fail." The purchases of
mortgage-backed securities, loans ranging from millions to
billions to financial firms like American International Group,
and guarantees of the assets of Citigroup and Bank of America
were all seen as unconventional practices of the Fed”(Amacher
Pate 2012). That way they would have the money to used to
help stabilize their financial state.
To support the firms that the Federal Reserve thought was to big
to fail, they passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act. “On July 21, 2010, President Barack
Obama signed the Dodd–Frank Wall Street Reform and
Consumer Protection Act into law, which permanently raises the
current standard maximum deposit insurance amount (SMDIA)
to $250,000”(Amacher Pate 2012). This way when there will be
less likely for the banks to be in a crisis because they would
have more money to work with.
I think they did what they thought they had to do to keep the
economy from collapsing. If everything started falling apart and
they couldn't come up with a solution, they would have bigger
problems to deal with than unconventional practices.
Amacher, R., Pate, J. 2012. Principles of Macroeconomics. San
Diego, CA. Bridgepoint Education Inc.
2. The Federal Reserve was established to provide bank safety.
Subsequently, the Federal Deposit Insurance Corporation
(FDIC) was created to provide protection to bank depositors
from bank failures. According to text, “it is important to allow
unsuccessful firms to fail and leave the industry if the market
system is to function effectively” (Amacher, 2012, p. 343). In
response to the numerous bank failures, the FDIC implemented
several changes. First, it mandated that all accounts that are not
interest bearing to be insured in full. Banks were using these
funds to issue high interest loans, while paying minimal interest
to funds that were deposited. Next, the Federal Reserve System
was divided into 12 districts. This method ensured that control
of the banks was not consolidated at a national level. At this
point, the Federal Reserve can also adjust the interest rates to
encourage or discourage banks from lending money. Also,
Congress passed the Dodd–Frank Wall Street Reform and
Consumer Protection Act. This was the response for
organizations who were deemed “too big to fail.” This law
required banks to have a high ratios of capital reserves, as well
as reduce their penchant for risk tasking.
Travis
References
Amacher, R., Pate, J., (2012).Principles of
Macroeconomics. San Diego, California: Bridgepoint Education,
Inc
Discussion 2
The Effect of Bank Lending on the Economy
A credit crunch is also known as a credit crisis and it happens
when banks choose to not lend out of their reserves when
interest rates are low and potential borrowers look too risky.
This reminds me of the housing bubble that happened during the
3. recession and how after the housing market crashed, there was a
credit crunch on loans that seemed too risky for the purchase of
a house. When there is a credit crunch, there is a reduction in
the number of loans that are given and they are given at a much
higher interest rate. Since there are tighter and stricter
requirements during a credit crunch, there is an affect in
economic growth from people not taking on loans for houses or
to purchase a new car or even being accepted for a credit card
and if they are it has a high interest rate. As a result of this,
there ends up being more supply than demand of goods and
services. During this time also, investors begin to pull out of
investing in businesses that may seem risky. Unemployment
begins to rise as a result of a credit crunch because aggregate
demand and GDP also begin to decrease from companies going
out of business and closing their doors subsequently reducing
the number of finished goods made.
How does a credit crunch affect consumer spending and
business investment?A credit crunch generally involves a
reduction in the availability of credit independent of a rise in
official interest rates. In such situations, the relationship
between credit availability and interest rates has implicitly
changed, such that either credit becomes less available at any
given official interest rate, or there ceases to be a clear
relationship between interest rates and credit availability. Many
times, a credit crunch is accompanied by a flight to quality by
lenders and investors, as they seek less risky investments
(Amacher & Pate (2012), para 14.2-3).
How does a credit crunch affect aggregate demand, GDP, and
unemployment?The crunch is generally caused by a reduction in
the market prices of previously "overinflated" assets and refers
to the that results from the price collapse. This can result in
widespreadforeclosure or bankruptcyfor those and entrepreneurs
who came in late to the market, as the prices of previously
inflated assets generally drop precipitously. In contrast,
4. a liquidity crisis is triggered when an otherwise sound business
finds itself temporarily incapable of accessing the bridge
finances it needs to expand its business or smooth its cash flow
payments (Amacher & Pate (2012), para 14.2).
references
Amacher, R., Pate, J., (2012).Principles of
Macroeconomics. San Diego, California: Bridgepoint Education,
Inc.