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0:01
[Music]
0:26
[Music] Many businesses, especially those that sell durable goods purchased with borrowed funds, are affected by monetary policy because the Federal Reserve's actions to increase or decrease interest rates affect their sales. Among these businesses is Parker Hannifin Corporation, a firm that employs 68,000 people in 48 countries and sells machinery components to other firms such as Caterpillar, Inc., and the Boeing Company.
1:00
Parker Hannifin's sales decreased during the weak recovery from the 2007-2009 recession in the United States and Europe. The Fed's expansionary monetary policy drove down interest rates, which spurred sales for Caterpillar and other firms that Parker Hannifin sells to. Although Parker Hannifin returned to profitability, some economists worried that the Fed's actions could result in an increase in inflation. Parker can be found on and around everything that moves.
1:33
They manufacture highly engineered components and systems that facilitate motion and the controlled flow of liquids and gasses for a wide variety of global markets to increase productivity and profitability of their customers. Parker's focus on solving some of the world's greatest engineering challenges sparks their passion for innovation. Their technological expertise creates a sustainable future, but Parker Hannifin faces economic
2:03
challenges as they produce goods used in the markets by their clients, who create solutions for their clients. The web of interconnectedness links multinational firms together through the global economy.
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[Music]
2:32
Higher unemployment is usually accompanied by lower inflation, and lower unemployment is usually accompanied by higher inflation. This trade-off exists in the short run but mostly disappears in the long run. Today, the short-run trade-off between unemployment and inflation plays a role in the Fed's monetary policy decisions, but the trade-off was not widely recognized until the 1950s. A graph showing the short-run relationship between the unemployment rate and the inflation
3:04
rate is called a Phillips curve.
3:10
The inverse relationship between unemployment and inflation is consistent with the aggregate demand and aggregate supply (AD-AS) analysis we developed in Chapter 24. The AD-AS model indicates that slow growth in aggregate demand leads both to higher unemployment and lower inflation. The AD-AS model and the Phillips curve are different ways of illustrating the same events. The Phillips curve has an advantage over the AD-AS model when we want to analyze explicitly
3:44
changes in the inflation and unemployment rates. Recognize that although we have used straight line "curves" in most discussions in this course, we can see the Phillips Curve displayed as an arch. The Phillips Curve theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven empirically due to the occurrence
4:11
of stagflation in the 1970s, and 2012 through 2016 when there were high levels of both inflation and unemployment. In 1968, Milton Friedman asserted that the Phillips curve was only applicable in the short-run and that in the long-run, inflationary policies will not decrease unemployment. Friedman then correctly predicted that, in the 1973-75 recession, both inflation and unemployment would increase. The long-run Phillips Curve is now seen as a vertical line at the natural rate of unemployment,
4:50
where the rate of inflation has little effect on unemployment - in the long-run. Accordingly, the Phillips curve is now seen as too simplistic, with the unemployment rate supplanted by more accurate predictors of inflation based on the velocity of money supply measures such as the "Money Zero Maturity" velocity also called the MZM Velocity, which is affected by unemployment in the short but not the long run.
5:19
Economists argued during the 1960s that the Phillips curve represented a structural relationship in the economy. A structural relationship is a relationship that depends on the basic behavior of consumers and firms and that remains unchanged over long periods. If the Phillips curve were a structural relationship, it would present policymakers with a reliable menu of combinations of unemployment and inflation.
5:48
They could use expansionary monetary and fiscal policies to choose a point on the curve that had lower unemployment and higher inflation. Or, they could use contractionary monetary and fiscal policies to choose a point that had lower inflation and higher unemployment. Economists have come to realize that the Phillips curve does not represent a permanent trade-off between unemployment and inflation.
6:16
In his 1968 presidential address to the American Economic Association, Milton Friedman argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation. Edmund Phelps made a similar argument. Friedman and Phelps noted that economists had come to agree that in the long-run aggregate supply was vertical. If this were true, the Phillips curve could not be downward sloping in the long run.
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Friedman and Phelps argued, in essence, that there is no trade-off between unemployment and inflation in the long run.
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At potential real GDP, firms operate at their normal level of capacity, and everyone who wants a job will have one, except the structurally and frictionally unemployed. Friedman defined the natural rate of unemployment as the unemployment rate that exists when the economy is at potential GDP. The actual unemployment rate will fluctuate in the short run but will come back to the natural rate in the long run and a higher or lower price level has no effect on real
7:29
GDP when real GDP is at its potential level. That is the critical moment in this discussion. When the economy is at potential GDP, and equilibrium between AS, AD, and LRAS is met, the Long-Run Phillips Curve will be vertical. Therefore, the long-run aggregate supply curve is a vertical line at potential GDP and the long-run Phillips curve is a vertical line at the natural rate of unemployment.
8:03
Friedman argued that the experience of the 1950s and 1960s, which showed a stable trade-off between unemployment and inflation, actually showed only a short-run trade-off. The short-run trade-off existed because workers and firms sometimes expected the inflation rate to be either higher or lower than it turned out to be. Differences between the expected inflation rate and the actual inflation rate could lead the unemployment rate to rise above or dip below the natural rate.
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If actual inflation is higher than expected inflation, actual real wages in the economy will be lower than expected real wages, and many firms will hire more workers than they planned to hire. The unemployment rate will fall. If actual inflation is lower than expected inflation, actual real wages will be higher than expected, so many firms will hire fewer workers than they had planned to hire, and the unemployment rate will rise.
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Friedman and Phelps concluded that an increase in the inflation rate increases employment (and decreases unemployment) only if the increase in the inflation rate is unexpected.
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When prices are stable, the price level does not change. So, price stability is another term for zero inflation. Some politicians prefer expansionary policies that would result in very low unemployment at the cost of higher inflation. Others prefer low inflation at the cost of higher unemployment. Political compromises result in the economy ending up somewhere in between. Although the policy menu view of the Phillips curve was popular among economists and policymakers
10:00
during the 1960s, most economists now believe that it deceiving to the layperson. Worker expectations are often self-fulfilling prophecies as workers accept "lower pay raises" as prices increase more rapidly in the economy, leading to a decrease in Real Wages.
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[Music]
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Government is not the solution to our Problem, government is the problem. It was in this atmosphere of faith in markets and the lack of faith in government that Alan Greenspan a free-market advocate to mistrusted government was chosen to lead the government's most powerful agency. Greenspan is widely known was in the day disciple of the radical individualist Ayn Rand I am for an absolute laissez faire free unregulated economy if you separate
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the government from economics you will have peaceful cooperation and harmony and justice among men. One of the great ironies of his career and of our national life Greenspan the so called of Ayn Rand a guy became the chief price fixer of money. [Music] Greenspan's first test would come immediately in the last five years the US stock market had more than tripled in value result of falling interest rates low inflation and a rediscovered faith in American capitalism.
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The point is ladies and gentlemen that greed for lack of a better word is good. Though greed wasn't new to Wall Street, the means for satisfying it were. For the first time the market was making widespread use of complex financial products like derivatives. This is on the worst day ever in the history of the New York Stock Exchange the Dow off more than 500 points paper losses more than 500 billion. The fear in the market quickly spread and so the Federal
12:12
Reserve lowered rates very rapidly provided liquidity very openly. Alan Greenspan handled that event very successfully reassured the markets eased monetary policy. You say this is really good this is why you want this monetary policy be raised and so there was a lesson there you can intervene you can end the crisis. It was a historic moment but it came with a dangerous precedent. From now on the Fed would be expected to lower rates based not just on problems
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in the real economy but in the stock market as well. Fed Chairman Alan Greenspan didn't want to see any regulation of banks of market and on the other hand he's pulling switches and moving levers and you know more than any Fed Chairman before or sense. Having cast aside his ideals to rescue the market Greenspan would soon master the art of intervention.
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A new, higher expected inflation rate can become embedded in the economy, meaning that workers, firms, consumers, and the government all take the inflation rate into account when making decisions. There is a short-run Phillips curve for every level of expected inflation. The short-run trade-off between unemployment and inflation now takes place from this higher, less favorable level.
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Phillips conjectured that the lower the unemployment rate, the tighter the labor market and, therefore, the faster firms must raise wages to attract scarce labor. At higher rates of unemployment, the pressure abated. Phillips's "curve" represented the average relationship between unemployment and wage behavior over the business cycle. It showed the rate of wage inflation that would result if a particular level of unemployment persisted for some time.
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This is indicative of what we currently see in the US economy as the Natural Rate of Unemployment between 4 and 6% has persisted for over 6 years. As of 2016, discouraged workers are leaving the job-search market and the unemployment rate seems to be decreasing. In reality, it is not decreasing. The natural rate of unemployment is the hypothetical level of unemployment the economy would experience if aggregate production were in the long-run state. The US economy is not in an expansion yet.
15:00
The natural rate hypothesis, or the non-accelerating inflation rate of unemployment (NAIRU), predicts that inflation is stable only when unemployment is equal to the natural rate of unemployment. If unemployment is below its natural rate, inflation will accelerate. Expansionary efforts to decrease unemployment below the natural rate of unemployment will result in inflation. This changes the inflation expectations of workers, who will adjust their nominal wages
15:36
to meet these expectations in the future. This leads to shifts in the short-run Phillips curve. The natural rate hypothesis was used to give reasons for stagflation, a phenomenon that the classic Phillips curve could not explain.
15:55
By the 1970s, most economists accepted the argument that the long-run Phillips curve is vertical and that the common view of the 1960s had been mostly wrong: It was not possible to buy a permanently lower unemployment rate at the cost of a permanently higher inflation rate. In the long run, there is no trade-off between unemployment and inflation. The unemployment rate always returns to the natural rate, no matter what the inflation rate is.
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The nonaccelerating inflation rate of unemployment (NAIRU) is the unemployment rate at which the inflation rate has no tendency to increase or to decrease.
16:39
The level of unemployment benefits can affect the level of frictional unemployment. If the ratio of benefits to paid employment is high then there is little incentive to take a job. For example, since the early 1980s unemployment benefits in the UK have been index linked; this means they have risen in line with inflation. Wages have tended to rise faster than inflation therefore the difference between benefits
17:08
and paid employment has grown increasing the incentive to get a job and therefore reducing the natural rate of unemployment in the UK. Unemployment benefits are not inflation indexed in the USA.
17:24
A key factor affecting structural unemployment is the geographical and occupational mobility of labor. If workers were more mobile this would help reduce unemployment caused by a mismatch of skills and geographical location. We have seen this evidenced by workers leaving areas around Michigan, Indiana, Ohio, and Pennsylvania as people have sought paying jobs in similar and not so similar regions. Some of the movement is to more populated places where new skills are applied, while
17:58
other movements are to new regions where skills are put to task. As workers became more skilled through education and retraining this helps reduce occupational immobility. To some extent the New Deal stemming from the Great Depression of the 1930s helped retrain workers and give them the necessary skills to be effective in the labor market thus reducing structural unemployment. Some of this is seen in the aftermath of the Great Recession as college enrollment has increased across the country.
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Another potential cause of the natural rate is the Hysteresis hypothesis, it states that if unemployment increases, like it did during the Great Recession, then it is likely to remain high for a considerable period, this is because workers become de-motivated and de-skilled while remaining unemployed and therefore find it difficult to get a job in the near-term future.
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[Music]
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The experience of the last 60 years indicates that how workers and firms adjust to their expectations of inflation depends on how high the inflation rate is. There are three possibilities: 1. Low inflation. When the inflation rate is low, workers and firms tend to ignore it. 2. Moderate, but stable inflation. People are said to have adaptive expectations of inflation if they assume that future rates of inflation will follow the pattern of rates of inflation in the past.
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3. High and unstable inflation. Workers and firms that failed to accurately anticipate the fluctuations in inflation during years of high inflation "such as 1973 through 1982 in the United States" could experience substantial declines in real wages and profits. Rational expectations are expectations formed by using all available information about an economic variable. Robert Lucas of the University of Chicago and Thomas Sargent of New York University
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pointed out an important consequence of rational expectations: An expansionary monetary policy would not work, and would not be a trade-off between unemployment and inflation, even in the short run. By the mid-1970s, most economists believed that expansionary monetary policy could cause the actual inflation rate to be higher than the expected inflation rate. This gap, seen between points B and C, would cause the actual real wage to fall below the
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expected real wage, and the unemployment rate would be below the natural rate. The economy's short-run equilibrium would move up the short-run Phillips curve. Lucas and Sargent argued that this assumption requires workers and firms to ignore inflation or to use adaptive expectations in making their inflation forecasts. If workers and firms have rational expectations, they will use all available information, including knowledge of the effects of Federal Reserve policy.
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As a result, the short-run Phillips curve will be vertical.
21:27
Lucas and Sargent's claim that the short-run Phillips curve is vertical and that an expansionary monetary policy cannot reduce the unemployment rate below the natural rate - surprised many economists. The experience of the 1950s and 60s seemed to show the short-run Phillips curve was downward sloping. Lucas and Sargent explained that the apparent short-run trade-off was the result of unexpected changes in monetary policy.
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They argued that a policy that was announced ahead of time would not cause a change in unemployment. Economists have remained skeptical of the argument that the short-run Phillips curve is vertical. These economists raise two main objections: 1. Workers and firms may not have rational expectations. 2. The rapid adjustment of wages and prices needed for the short-run Phillips curve to be vertical will not actually take place.
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At the core of this discussion, it is important to recognize that when people face the choice between taking an Under-Employment job and taking no job at all, they will generally take the lower than anticipated paying job. It is not important they anticipate the opportunity cost loss or not. People need to make figurative ends meet. They may be looking for better paying employment, but in the meantime they will do what they need to do, to make ends meet.
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During the 1980s, some economists argued that Lucas was correct in assuming that workers and firms formed their expectations rationally and that wages and prices adjust quickly but Lucas was wrong in assuming that unexpected changes in the money supply were the main cause of fluctuations in real GDP. They argued that changes in "real" factors, particularly technology shocks, caused fluctuations in real GDP. Technology shocks are changes to the economy that make it possible to produce more output
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with the same number of workers, machines, and other inputs. Real business cycle models focus on real rather than monetary expansions or fluctuations in real GDP.
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The short-run Phillips curve shows the short-run trade-off between inflation and unemployment. On any particular short-run Phillips curve, an increase in inflation will be accompanied by a decrease in unemployment. The movement from point A to point B shows a decrease in the unemployment rate and an increase in the inflation rate. Periods of stagflation are often the result of adverse supply shocks, caused by rapid increases in the prices of resources, such as oil.
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An adverse supply shock that shifts the SRAS curve to the left will also shift the short-run Phillips curve upward. As the graph shows, a shift in the short-run Phillips curve creates the possibility of a simultaneous increase in inflation and unemployment. Stagflation is shown as a movement from point A to point B on the lower graph.
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[Music]
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Following actions by the Organization of Petroleum Exporting Countries, OPEC, oil prices rose in 1974, which caused the short-run aggregate supply curve to shift to the left: we talked about this one. The result was a higher price level and a lower level of real GDP. On a Phillips curve graph, the short-run Phillips curve shifted up, as both the inflation rate and the unemployment rate increased. The combination of rising unemployment and rising inflation placed the Federal Reserve
25:35
into a difficult position. If the Fed used expansionary monetary policy to fight unemployment, the aggregate demand curve would shift to the right. Real GDP would increase but at the cost of higher inflation. If the Fed used a contractionary monetary policy, the aggregate demand curve would shift to the left, causing a movement down the short-run Phillips curve leading to higher unemployment. In the end, the Fed decided to fight unemployment with expansionary monetary policy, even though
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this decision worsened the inflation rate.
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By the late 1970s, the Federal Reserve had gone through a two-decade period of increasing the rate of growth of the money supply. In August 1979, President Carter appointed Paul Volcker as chairman of the Board of Governors of the Federal Reserve System. Volcker was convinced that high inflation rates were damaging the economy. Volcker began reducing the growth rate of the money supply. Interest rates rose, causing a decline in aggregate demand.
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The Fed's contractionary monetary policy shifted short-run equilibrium down the short-run Phillips curve and reduced inflation from 11 percent in 1979 to 6 percent in 1982. But the unemployment rate rose to 10 percent. As workers and firms lowered their expectations of future inflation, the short-run Phillips curve shifted down. By 1987, the economy was back to the natural rate of unemployment.
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Under Volcker's leadership, the Fed had reduced the inflation rate from more than 10 percent to less than 5. A significant reduction in the inflation rate is called disinflation. This episode is often referred to as the "Volcker disinflation." The disinflation had come at a very high price. From September 1982 through June 1983, the unemployment rate was greater than 10 percent. Robert Lucas and Thomas Sargent argue that a less painful disinflation would have occurred
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if workers and firms had believed Volcker's announcement that he was fighting inflation. The problem was that Fed chairmen had made promises similar to Volcker's throughout the 1970s, but inflation worsened. In 1987, President Ronald Reagan appointed Alan Greenspan to succeed Paul Volcker as Fed chairman. Greenspan served in this position for 18 years. Ben Bernanke was appointed chairman in 2006. Under Greenspan's leadership of the Fed, inflation was reduced nearly to the low levels of the
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1950s and 60s. The severity of the recession of 2007-09 led some critics to question whether decisions made during Greenspan's leadership might have played a role in exacerbating the crisis.
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During Greenspan's term, the Fed took two actions that some economists believe contributed to the financial crisis that lengthened the recession of 2007-2009. 1. De-emphasizing the money supply. Before 1987, the Fed would announce annual targets for how much M1 and M2 would increase during the year. In February 1987, near the end of Paul Volcker's term, the Fed announced that it would no longer set targets for M1. In 1993, Alan Greenspan announced that the Fed would no longer set targets for M2.
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The Federal Open Market Committee, the FOMC, has since relied on setting targets for the federal funds rate. 2. The importance of Fed credibility. The Fed learned an important lesson during the 1970s. Workers, firms, and investors had to view Fed announcements as credible if monetary policy was to be effective. Remember we talk about expectations? This is how expectations are made ==> does the Fed tell the truth? Over the past 25 years, the Fed has taken steps to enhance its credibility.
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Since 1990, whenever a change in Fed policy was announced, the change has actually taken place. Greenspan revised the previous policy of Volker who kept secrets or misled people about the target for the federal funds rate. Today the minutes of the FOMC meetings are made public after a brief delay. In February 2000, the Fed helped make its intentions for future policy clearer by announcing at the end of each FOMC meeting whether it considered the economy in the future to be
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at greater risk of higher inflation or recession. In 2011, Ben Bernanke began holding press conferences following some FOMC meetings, the first time a Fed chair had done so. These efforts helped to establish reliability in the FOMC for their intensions, and therefore people's expectations can now be based on better information, they can rely on. Alan Greenspan can be put down as one of the best chairman of the Federal Reserve in American history his 18-year tenure was marked by
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unprecedented economic growth budget surpluses and a booming stock market and he was praised universally for shepherding the economy through the shock of 9/11 Now he's written his memoir the age of turbulence which comes out just as he's coming under fire something he's not used to for today's housing and lending crises his critics say he established a pattern of bailing out Wall Street investors Greenspan sat down with us for
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his first major interview defending himself against the criticism that he should have done something to stop the shady practices and subprime lending in a rare admission he told us he missed its significance if you knew these practices were going on and even maybe just suspected that there was something illegal or shady why didn't you speak out well if you had a huge megaphone people really listen to Alan Greenspan well I was aware a lot of these
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practices were going on I have no notion of how significant they had become until very late I didn't really get it until very late in 2005 in 2006 but others that the Fed did get it that banks and mortgage companies had already signed up millions of homebuyers and speculators many with poor credit for so-called subprime mortgages with complicated interest rate adjustments that have led to record numbers of defaults some of the practices were fraudulent one of
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your former Fed governors Ed Gramlich said that he proposed that the Fed examine these lending practices and look into them from to see if something could be done and that you rejected that idea well I wanted to reach out I thought that it one would not be we would not be capable of doing what you were suggesting but of sitting on them taking somebody late what well I think not even if you even looked into it well it's nothing to look
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into particularly because we knew that there was a number of such practices going upward it's very difficult to for banking regulators to deal with that he insists there's nothing he could have done to prevent today's plummeting home prices and the fact that a million families have lost their homes and many more could but some economists now say Greenspan actually created the housing bubble and the credit crunch by keeping interest rates too low for too long just
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remember we raised interest rates at every meeting from June of 2004 till I got out of office you raise rates in 2004 but only after you held interest rates at historically low levels for three years while the bubble the housing bubble was forming and you had thirteen rate cuts in that period of time it was our job to unfreeze the American banking system if we wanted the economy to function this required that we keep rates modestly low but some of the Fed
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governors who worked with you at the time are now saying that they think interest rates were too low for too long I think they are mistaken what this shows is how certain he is about his views and how firmly he guided the Fed when he was chairman and dealt with shocks to the financial markets by quickly lowering interest rates now in the current turmoil investors are calling on his successor Ben Bernanke to do what Greenspan would have done the
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sense is you would have acted sooner you would have thrown more cash and liquidity into the system you would have acted faster and more dramatically I'm not sure that's true and let me tell you why we were dealing in an environment back there where inflation was easing so we could move sooner without the fear of stroke stoking inflationary pressures you can't do that anymore and therefore it's a different world I'm not certain that I would have done
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anything different all right arm you don't think you would have acted any family childhood you don't see any light between you and what Mr. Bernanke I think he's doing an excellent job the CEO the Ford and Chrysler are begging the Fed to lower rates I mean on their hands and knees I would suggest that they focus on selling, creating better cars for their customers. There were two other developments in monetary policy over the past 20 years: The first action
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was the decision during 1998 to help save the hedge fund named: Long Term Capital Management -LTCM. In 1998, LTCM suffered heavy losses. Other financial firms that lent to LTCM feared the firm would go bankrupt and pushed for repayment of their loans. If LTCM had been forced to sell all of its investments quickly, the prices of securities it owned would have declined. The Fed was concerned that a sudden failure of LTCM might lead to failures of other financial firms.
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With Greenspan's support, the president of the Federal Reserve Bank of New York met with the management of LTCM and the firms to which LTCM owed money. The Fed's actions succeeded in avoiding wider damage, but critics argued that the Fed's intervention set the stage for other firms to take on excessive risk, with the expectations that the Fed would intervene on their behalf if they should suffer heavy losses too.
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The second action was the decision to keep the target for the federal funds rate at 1 percent from June 2003 to June 2004. Some economists and policymakers criticized the Fed's decision to keep cutting the target for the federal funds rate for 18 months after the end of the recession in November 2001 and to keep the rate at 1 percent for another year. Keeping rates low, critics charge, helped fuel the housing bubble that eventually deflated in 2006, with disastrous effects for the economy.
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Quantitative easing is a central bank policy that attempts to stimulate the economy by buying long-term securities. The Quantitative Easing program launched by the Federal Reserve in November 2008, involved the purchase of long-term Treasuries and Mortgage-backed securities in an effort for the Fed to reduce long-term interest rates. The Federal Reserve could have kept interest rates higher and allowed the money supply
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to increase more slowly if Fed policymakers could have foreseen that unemployment rates below 6% would lead to rising inflation. A deflationary spiral happened as workers and firms began to expect deflation, which shifted the short-run Phillips curve down. If unemployment remained above the natural rate, deflation would worsen, which could cause workers and firms to expect even more deflation, shifting the short-run Phillips curve down again.
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A deflationary spiral did not occur because the Fed actively pursued expansionary monetary policy with a very low target for the federal funds rate and with quantitative easing. Also, the Fed had credibility with its goal of low inflation of about 2%. Quantitative easing, and an exceptionally low federal funds rate, pushed interest rates to very low levels. Seeking higher returns, investors, banks, and pension funds undertook investments with higher risk.
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Friday's unemployment number was a troubling surprise up from nine point six to nine point eight percent the economists who decide such things say the recession ended in 2009 but this is the worst recovery the nation has ever seen Ben Bernanke is concerned as chairman of the Federal Reserve Bernanke has enormous power over the world economy and he's used that power in ways that the world has never seen during the panic of 2008 he committed trillions of
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dollars to rescue the financial system and the Fed dropped interest rates nearly to zero now in a new move that's become controversial Bernanke intends to commit another six hundred billion to hold down interest rates chairman of the Fed rarely do interviews but this week Bernanke feels he has to speak out because he believes his critics may not understand how much trouble the economy is in we wanted to know whether we're headed for another recession whether
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Congress should extend the Bush tax cuts but first we wanted to talk about unemployment which has been at nine and a half percent or more for 16 months. The unemployment rate is just not going down unemployment is just about the same as it was amid to 2009 when the economy started growing so that that's a major concern and it looks that at current rates that it may take some years before the unemployment rate is back down to more normal levels.
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We lost about 8 million jobs from the brink and I wonder how many years you think it will be before we get all those jobs back. You're obviously right between the peak and the end of last year we lost eight and a half million jobs we've only gotten about a million back so far and that doesn't even account that the new people coming into the labor force at the rate we're going it could be four or five years before we are back to a more normal unemployment rate somewhere in the vicinity of say
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five or six percent four or five years and Bernanke told us something else that makes that even more painful the other aspect of the unemployment rate that really concerns me is that more than 40% of the unemployed have been unemployed for six months or more and that's unusually high and people who are skills erode their attachment to the labor force diminishes and it may be a very very long time before they find themselves back in a normal working position.
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When considering economic systems deployed around the globe, economists have found that more independent central banks are associated with lower levels of inflation. This suggests that a correlation is found between central bank independence and the level and variability of real economic variables such as growth, unemployment, and real interest rates. THE DEGREE OF CENTRAL BANK INDEPENDENCE varies considerably across countries.
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Several authors found that more independent central banks are associated with lower levels of inflation. Alesina and Summers investigated whether one can find a correlation between central bank independence and the level and variability of real economic variables such as growth, unemployment, and real interest rates. They concluded that while central bank independence promotes price stability, it has no measurable impact on real economic performance.
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On the other hand, traditional arguments for monetary policies that are politically responsive, stress that politically sensitive central bankers are likely to be more concerned than independent bankers with increasing output and reducing unemployment and real interest rates. If monetary policy can achieve these objectives one might expect independent central banks to achieve lower rates of inflation at the price of inferior real economic performance.
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The impact of central bank independence on economic performance is ultimately an empirical question. Conclusions by people who studied these relationships conclude that while central bank independence promotes price stability, it has, really, no measurable impact on real economic performance. It comes down to either Stability or Performance.
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The financial crisis of 2007-2009 led the Fed to move beyond the federal funds rate as the focus of monetary policy. Like other policies that break sharply with the past, the Fed's actions had supporters and critics. In arranging to inject funds into the commercial banking system by taking partial ownership of some banks and other policy actions, the Fed worked closely with the Treasury Department. The chairman of the Fed usually formulates policy independently of the Secretary of the Treasury.
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If this collaboration were to continue, some economists and policymakers question whether the Fed will be able to continue to pursue policies independent from those of the administration. The Fed's extensive interventions in the financial system led members of Congress to scrutinize Fed policy to an unusual degree. Some observers worried that this intense Congressional oversight might limit the Fed's freedom to act in the future.
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The main reason to keep any central bank independent of the rest of the government is to avoid inflation. Whenever a government is spending more than it collects in taxes, it must borrow the difference by selling bonds. Even in developed countries, governments that control their central banks may be tempted to sell bonds to the central bank rather than to the public. The more bonds the central bank buys, the faster the money supply grows, and the higher
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the inflation rate will be in the long run. Another fear is that if the government controls the central bank, it may use that control to further its political interests. In the United States, for example, a president who had direct control over the Fed might be tempted to increase the money supply just before running for reelection, even if doing so led to higher inflation in the long run. My advice to you, is to Think Like an Economist as you consider all relevant issues.
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