Bill Cutshall’s Weblog

December 23, 2008

What Comes After Zero?

Filed under: Economics — billcutshall @ 5:33 am
Tags: , , , ,

With the Federal Reserve’s interest rate near zero some may wonder what tools are still available to bolster our economy and return it to health.  For those interested in monetary policy (and that’s a pretty small percentage of the population even in these times) Robert E. Lucas Jr. has written one of the best quick summaries of what is happening to our economy, what is being done to change it, and why it should work that I have read lately.

My poor summary of the explanation is that people are currently uncertain, risk averse, and looking for high-quality investments as stable as cash.  The Fed’s response is to buy up high-risk investments with cash thereby reducing the quantity of out-of-favor risky instruments and increasing the availability of in-demand stable government-backed instruments like cash and T-Bills.  The theory is basic economics, really.  When something is in demand (safety is in demand) increase the supply.  When demand for a good falls (risk is out of fashion) reduce the supply.  By swapping quality securities (cash and T-Bills) for questionable securities (CMOs and other popular modern villains) the Fed will keep the money market moving and prices stable.

My explanation is a poor substitute for the actual article though.  Read Robert E. Lucas Jr.’s article in The Wall Street Journal for a much more complete understanding.


1 Comment »

  1. Great Blog post. I am going to bookmark and read more often. I love the Blog template if you need any assistance customizing it let me know!

    Comment by Susan Kishner — December 23, 2008 @ 5:55 am | Reply

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