Topic: Economics
Did the Fed Stimulus Actually Work? At the moment not quite!by Jeff Peters
(conservative)
Friday, August 8, 2008
In the past few days, professional economists have been debating whether or not the Fiscal Stimulus package actually worked.
Just on some important insight into the package: most of the funds that were distributed went to lower-middle and lower class citizens. Economists who supported for this stimulus program probably believed that the mentioned groups of Americans don't have such a forward-looking view on government spending. In other words, they don't fit the Permanent-Income-Hypothesis model of Milton Friedman. Actually, they wanted to send checks to individuals that fit the Keynesian model - spend now and screw savings.
In macroeconomic terms, Rational Expectations - as popularized by Chicago Economist Robert Lucas, held true. The majority of the population anticipated that this money would have to return to the government in the form of higher taxation or borrowing money from overseas - which people also believe will ultimately require a payment in the future. Parents don't want their children to have huge bills to pay. That's why they are saving - according to this study.
Thus far, it seems the neoclassical or monetarist economists of the Chicago school and their models of intertemporal choice fit this stimulus plan much better than the Keynesians.
However, Gregory Mankiw, noted neo-Keynesian economist, opines that we have seen only the beginning of the stimulus package at work. Maybe, we just need a bit more time to see the effects because fiscal policy takes time just like monetary policy set at the Fed!
Perhaps, people are saving money to stave off the probable upcoming financial crisis. If this is the case, then why would they put money in a financial system most people believe will collapse?
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Posted By: Jahfre Fire Eater
Date: 2008-08-08 16:44:32
Of course the package "worked" it was just improperly named. :-) It was a blatant bribe to secure Congressional seats in an election year. The results don't really matter, it's the thought that counts.
The stimulus was nothing more than a "feel-good" measure, the problems facing this economy are far deeper and far more dangerous than will be solved by such a drop in the bucket measure.
For the first time in the history of the Fractional Reserve System the Non-Borrowed Reserves in Depository has not only hit zero, but has taken a nose dive to nearly negative 92%. We will hear that from our politicians? No, they are doing everything possible to prevent a panic, and such news would definitely cause a panic if the people ever came to understand what such data means. The Federal Reserve quietly, very quietly released that information, but I have not heard a word about it.
Now, if you don't know what it means then I'll let you in on a little secret...
It means that the banks in this country don't have reserves to cover depositors, think about that carefully now and exactly what it means. For the first time, in the rather long history of the Fractional Reserve System the reserves of all the banks in this country have reached a negative value, it has never happened before, not even during the Great Depression.
Once again, if we want to be deceived then I suppose we can take comfort in the fact that the Stimulus "worked" to a very small degree. However, I would rapidly be exchanging the Fiat Money in my accounts to something of more value and utility.
Posted By: Christopher Espinal
Date: 2008-08-09 12:57:09
The reserve requirement is a tool of monetary policy. If that's true (-reserve requirement) it only means that the Federal Reserve is opening the possibility of loaning to local banks and therefore covering for the depositors. It would be a strategy to let banks do as much business as possible and keep their depositors insured.
But, back to reality, what it actually means is that there is a massive, major bank crisis looming over this country and the banks themselves, particularly foreign banks are extremely worried about the situation. First, there was a report by a USB strategist that expressed fears that the actions of the FED had a far more expansion than those being publicized and the fear was expressed that the actions being taken were taken because the FED was attempting to stave off a massive banking collapse in the U.S. but it was being done under the guise staving off recession. That alone explains a lot about the current credit liquidity crisis in this country, the banks are technically bankrupt. When the banks don’t have non-borrowed reserves it means just that, they have no reserves, they are in essence, for the first time in the history of fractional reserve system: broke!
While it is true, that if a bank must, it can go to the TAF and then use TAF funds to restore reserves, but that is not the most ideal way the system is suppose to work and it puts the FED in a precarious position of guaranteeing an ever-increasing mound of collateral. In essence, the old fractional reserve system died, it was as though the system, once held as the “gold standard” of banking was suddenly switched for the “sub-prime standard” of banking, and yes, it is just that drastic.
Now, if you can read this chart, you will see what I am talking about:
While negative non-borrowed reserves is an indication that there is a major problem in the American banking system, it points to an even greater potential problem and that is the fact that the banks be forced to rely upon the TAF, which over the long run is just as concerning.
What it really means is the the people of this country is being kept in the dark as much as possible about the severity of the problem, and for good reason, it would cause a massive panic and this government simply cannot afford such a panic on their hands. If the banking system in this country took such a huge hit to confidence the game would be over almost overnight.
Also, the drastic rate of the drop in non-borrowed reserves should also be of concern, it indicates the depth of the problem, dropping a negative 100 percent in a few months shows a foundational weakness in the system, one that will not be easily repaired.
Posted By: Christopher Espinal
Date: 2008-08-09 19:26:00
I'm agreeing with you that YES there's a major banking crisis. I was just saying that the tool is used to stop that crisis. You are much too emotional about these issues. Let your brain do the thinking!
Posted By: Christopher Espinal
Date: 2008-08-10 10:37:05
I derived that idea from the tone of the words you use. Of course I'm not sure if your blood pressure rises when you read my comments. I think I'm trying my best to be pragmatic, and I hope you are doing the same!
$1000 to $2000 per household was just enough to keep families from getting behind in the mortgages by one more month. That's how precarious the whole system is. It probably slowed the foreclosure rate enough to allow working people to save or find higher paying jobs, It was temporary. But the national debt it created was permanent.
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