Impact of Global Economic Slump in 2008

Topics: Monetary policy, Jacksonville, Florida, Economics Pages: 19 (7473 words) Published: June 16, 2013
The impact of the global economic slump on the U.S., with particular emphasis on Jacksonville

MBA Students
Jacksonville University

October 4, 2011

Macroeconomic recessionary forces mire global, national, regional, and local economies Financial markets wait on the edge of their collective seats for the U.S. Federal Reserve Bank’s Chairman to offer strategic insights into battling the recessionary global economy. All hopes placed on a short statement after each Federal Open Market Committee (FOCM) meeting; but will they take action or merely hint that actions could be taken if needed next month. If the Fed kicks the ball far enough to the right, the Christmas season will be upon us and the national economy will receive a boost from seasonal consumption. The most recent FOMC meeting produced a highly debated economic strategy touted as “Operation Twist” by the popular press which consists of the Fed buying “$400 billion of U.S. debt with maturities of six to 30 years through June while selling an equal amount of securities due in three years or less” (Eddings & Walker, 2011). While initially met with resistance, as many of the announcements by the FOCM have recently, positive clamor from leading economists now monopolizes the internet news boards. Walker and Eddings cite in their story that long term bond rates have tumbled by as much as 70 basis points in anticipation of the Federal Reserve’s buying spree. While monetary policy seems to be currently softening the recessionary impact, the Fed has limited tools and ability to impact the flailing global economy. The Federal Reserve System possesses four basic tools to affect monetary policy; open-market operations, the reserve ratio, the discount rate, and the term auction facility. Using these tools, the Fed can pursue two basic strategies – expansionary and restrictive monetary policy. Since changing the reserve ratio is somewhat of a blunt instrument, and could have undesirable affects on the liquidity of the banking system, the other three tools hold more promise of nudging the economy back on track. The current discount rate (0.75%) established by the FOMC Feb. 17, 2010 (Fed, 2010) was maintained at the September meeting. Although decreasing the discount rate would increase bank reserves and theoretically the money supply, while decreasing interest rates, overall consumer sentiment and business forecasts are too pessimistic to result in an increase in investment spending and aggregate demand, and therefore would not result in an increase in GDP. The excess money supply, if banks do increase loaning activities, would likely be used to pay off consumer debt and increase cash assets held by businesses, rather than spurring on a recessionary U.S. economy. As long as the U.S. continues to be racked by news of decreases in inflation-adjusted income and increased unemployment rates, lowering the discount rate is unlikely to result in increased consumer spending on big ticket items, and is very likely only to result in increased debt retirement and savings. Increasing consumer spending is critical to spurring a recessionary economy. Open market operations and the term auction facility, however, offer opportunities for gaining traction with expansionary monetary policies, possibly stiffening the string needed to push a sputtering economy. Private sector securities purchases could help spur key business sectors; such as the housing industry. By providing increased cash directly into housing markets, FOMC monetary policies may provide the impetus needed from a supply-side economic perspective. Investments in housing industry based securities would increase commercial bank reserves and potentially the money supply, while reducing interest rates, thereby potentially increasing housing industry investment spending. However, while in theory this should increase aggregate demand and the economy in general, other factors prevent or inhibit those results. According to...

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