W4PR

Participation Expectations.
In order to be eligible for the maximum score on this graded activity, the initial response to the discussion questions must be at least 200 words and be suitably supported (citations) with material from our our assigned textbook readings.  Subsequent comments to other students must "add value" to the discussion and should be approximately 100 words each in order to be considered "substantive" and therefore eligible for the maximum score

APA FORMATTING NOT NEEDED : Please keep the two post separate

Discussion Post #:1

From 2007-2010, the Federal Reserve Bank (the Fed) used many practices that had never before been seen from the central bank of the United States.

Discuss the some of the actions that the Fed took during this period.  Such as:

· How the Federal Reserve’s lending practices changed during this period.

· What did the Federal Reserve do to support firms deemed “too big to fail.”

Do you believe these actions were necessary to avoid a collapse in the financial system?  Support your opinion with information from the textbook or external source(s).

Reference: Chapter 12, section 12.4: Bank Failures During the Great Recession, Chapter 14, section 14.4: Monetary Policy in the 2000s, and Conclusions section at the end of the Chapter 14

Guided Response:  Review the posts of your classmates and respond to at least two of your classmates by agreeing or disagreeing with their opinions on whether the Federal Reserve actions were necessary to avoid the collapse of the financial system.

Peer Response #1: AM

At the height of the Great Recession, the Fed made changes to the FDIC to prevent the same kind of loss from happening again.  “First, all accounts that do not earn interest are insured infull, regardless of the balance” (Amacher & Pate, 2012). Followed by the increase in the SMDIA to the amount of $250,000. This law (Dodd–Frank Wall Street Reform and ConsumerProtection Act ) was enacted by President Obama as a permanent fixture to the banking system. 

The Fed took actions the were considered unconventional for the large financial institutions that were considered nonbanks. “Too Big To Fail” means these companies are too important the economy to let fail or go bankrupt. In an effort to keep these institutions from closing, the Fed offered bailout programs.

The actions taken by the Fed were thought necessary to keep from further hindering the U.S. economy. President of Federal Reserve Bank of Minneapolis, Neel KashKari, said, “We had a choice in 2008: Spend taxpayer money to stabilize large banks, or don’t, and potentially trigger many trillions of additional costs to society” (Kashkari, 2016). The failure of these companies could have harmed homeowners, businesses, and families across the U.S. much more than the bailouts that were given. Many believe that these banks should be broken up because they are too big and taxpayer bailouts should not be required to keep them afloat. “[…] there is no question that their presence at the center of our financial system contributed significantly to the magnitude of the crisis and to the extensive damage it inflicted across the economy” (Kashkari, 2016).

 

Kashkari, Neel (2016). Lessons from the Crisis: Ending Too Big to Fail. Federal Reserve Bank of Minneapolis. Retrieved from: https://www.minneapolisfed.org/news-and-events/presidents-speeches/lessons-from-the-crisis-ending-too-big-to-fail

Amacher, R., Pate, J., (2012). Principles of Macroeconomics. San Diego, California: Bridgepoint Education, Inc.

Peer Response #2:HN

As noted by Amacher & Pate (2012), “during the 2007-2009 recession, the economy saw $540 billion of failed bank assets, or roughly 1.5 times the dollar value of assets that failed during the loan crisis,” (p. 1). In an effort to help avoid crisis similar to the 2007-2009 recession several polices were changed. For example all account that do not accrue interest were backed in full and the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. The act included safe guards to that raises the maximum deposit insurance, prevents excessive risk taking, and add extra protection to ensure consumers are not exploited, (Wall Street Reform: The Dodd-Frank Act, n.d.). With the ‘Too Big Too Fail’ Doctrine, Senator Dorgon attempted to pass legislation that noted if a financial institution was too big to fail that it should be broken up. While the legislation did not pass the act did enact bailout blocks, capital buffers, and require for large firms to have a living will that would outline how they would wind down quickly in the case of bankruptcy, (Onaran, 2016).

I do believe that these actions were necessary to help avoid a future collapse but to also help provide additional protection to consumers/taxpayers. Taxpayers should not have to bear the costs for wall street’s irresponsibility or abusive financial institution practices. Fairness and transparency, which this act help enforce, is an important part of any financial transaction.

References:

Amacher, R., Pate, J., (2012). Principles of Macroeconomics. San Diego, California: Bridgepoint Education, Inc.

Onaran, Y. (2016). Too Big to Fail. Bloomberg. Retrieved May 12, 2016 from http://www.bloomberg.com/quicktake/big-fail

Wall Street Reform: The Dodd-Frank Act. (n.d.). The White House. Retrieved May 12, 2016 from  https://www.whitehouse.gov/economy/middle-class/dodd-frank-wall-street-reform

Discussion Post # 2:

The Effect of Bank Lending on the Economy

In conducting expansionary monetary policy, even if the Federal Reserve Bank is providing reserves to the banking system, during a recession or during periods of slow economic growth, banks may choose not to lend out their reserves when interest rates are low and potential borrowers look risky.  This is known as a “credit crunch”. Explain how a credit crunch affects economic growth. Specifically, answer these questions in your post:

· How does a credit crunch affect consumer spending and business investment?

· How does a credit crunch affect aggregate demand, GDP, and unemployment?

Reference:  Chapter 14.1 Is Monetary Policy Effective? and section 14.3: Domestic Sectoral Effects.

Guided Response: Review the discussion board posts of your classmates.  Respond to at least two of your classmates with responses that allow them to extend their thinking.  Support your ideas with concepts found in the assigned reading

Carefully review the Discussion Forum Grading Rubric for the criteria that will be used to evaluate this Discussion Thread. 

Respond

Peer Response #1:EP

Credit Crunch is define as a sudden sharp reduction in the availability of money or credit from banks and others lenders. it occurs when there is a lack of funds available in the credit market making it difficult for borrowers to obtain financing. This happens when leaders have limited funds available to lend or have increase the cost of borrowing to a rate that affordable to most borrowers. When it comes to lending institutions suffering loses from land they are unable to lend out more money. this usually occurs when borrowers default meaning when the bank forecloses on the mortgagees and attempt to sell these properties to regain funded they loaned out. Sometimes when the market is low the bank is left at a lost so they required to retain a minimum level of liquidity. Overall Credit Crunch can do a lot of damage to the economy by stifling economic growth through decreased liquidity and them losing the ability to lend it causes many consumers to go bankrupt. As banks continue to refuse credit even to qualified borrowers businesses feel the pressure making companies sell their stock and bonds to recover funds since getting any kinds of credit cards and loans would be more expensive in the long run. this would cause a fall in the fourth quarter for corporate their spending accounts would cause a push causing the US to fall into a recession.   Amacher, R., Pate, J., (2012).  Principles of Macroeconomics.  San Diego, California: Bridgepoint Education, Inc. 

Peer Response #2:GT

Explain how a credit crunch affects economic growth. Specifically, answer these questions in your post: How does a credit crunch affect consumer spending and business investment? How does a credit crunch affect aggregate demand, GDP, and unemployment?

When it comes to credit crunch, it narrows down to the decline of loans or credits that are not easily available or comes at a higher cost such as the increasing of interest rates. As such, lenders may not be quick to extend credit to others because of previous financial loss; therefore, this becomes known to us as a recession period. As such, credit crunch can definitely affect economic growth since there is a slowdown in consumer spending and businesses' are or may lose investments or assets due to the credit crunch. For instance, the credit crunch affects consumer spending since they are not able to acquire a credit line and so, it reduces or limits on what they may be able to spend. Plus, during the credit crunch, consumers may not want to accept the terms of the credit line because of high interest rates; again, this will then limit on how consumers make their purchases, which then stops economic growth in that aspect. Consequently, credit crunch may also affect a business investment in many ways such as less customer’s equals less profits since consumers may not want to pay those high interest rates just to obtain a credit line. Moreover, businesses' loses in those investments when they are not growing and so, they are not able to increase their working capital, which then may result in having to liquidate business assets. These are some of the reasons as to how credit crunch would affect consumer spending as well as business investment. In all essence, the economy will see a reduction in growth since lesser people are spending since companies have strict credit line rules or excessive fees [e.g. high interest].

When it comes to aggregated demand [AD], this generally means the total of spending towards products, goods, and/or services throughout different aspects of our economy such as consumer or business spending. Essentially, credit crunch can affect AD and the way the curve shifts; for instance, as I previously mentioned; banks would raise higher interest rates and so, the AD would fall since this has caused an increase of demand for money while dealing with higher interest rates and so, this would definitely cause a change of shift to AD. And, our economy would be facing deflation because of the credit crunch. Additionally, consumer confidence may be another effect that is noticed during said times since one may lose the confidence in a business since they are trying to make up for loss profits by raising their interest rates. Basically, aggregated demand may see "changes in planned spending that will cause a shift of AE and AD while affecting the output, employment, and the price level" (Amacher & Pate, 2012). It is apparent that during a credit crunch, the Gross Domestic Product (GDP) can also become affected as well since GDP "is the total market value of all final products produced within a country during a given time period" (Amacher & Pate, 2012); having said that, the less people are spending, the more our GDP is affected because the economy is not growing, which is what GDP essentially means. For example, when we were faced with the great recession and the housing market was taking a big hit since there was a decline in sales; the GDP was also negatively affected by showing a decline because of the credit crunch. At last, when it comes down to unemployment, there is no doubt in my mind that we will see an increase in unemployment since businesses' that are seeing a decline in sales may result in handing out pink slips to their staff since they cannot afford it. In accordance with the Federal Reserve, "a significant portion of manufacturing employment losses over the Great Recession was the manifestation of an unusually large tightening in credit availability—a credit crunch—rather than a structural change in the linkages between access to bank credit and employment" (Haltenhof, Jung Lee, & Stebunovs, 2014). Conclusively, credit crunch has an overall affect towards the growth of our economy; in fact, it slows it down while reduction of credit is noted as well as an increase in interest rates; for which, limits a consumer, business, or government to spend; in other words, it limits their buying power. Therefore, we are not stimulating our economy during a credit crunch.

Reference

Amacher, R., Pate, J., (2012). Principles of Macroeconomics. San Diego, California: Bridgepoint Education, Inc.

S. Haltenhof, S. Jung Lee, & V. Stebunovs. (2014, June). The Credit Crunch and Fall in Employment during the Great Recession. Federal Reserve. Retrieved from: http://www.federalreserve.gov/pubs/feds/2014/201406/201406pap.pdf

Two Separate Discussion Post

Must Complete both and use the classroom text as well