Video instructions and help with filling out and completing Which Form 2220 Reserved

Instructions and Help about Which Form 2220 Reserved

Okay let's go ahead and get started I would like to welcome the students back for our second lecture today as well as our faculty I know we have some new guests and friends that are here today you are in for a treat if it's anything like it was Tuesday this will be another great session without further ado Chairman Bernanke thank you very much you came back that's good news as you know today is the second of four lectures on the financial crisis in the Federal Reserve I as I said I think it's much it's very helpful to try to put the recent crisis and the ongoing recovery into a historical context and so last time we talked about the origins of central banking going back to Bank of England and the debates of the 19th century the origins of the Federal Reserve and the Federal Reserve's first great challenge which was the Great Depression of the 1930s and we drew some lessons from the 1930s that will come back and be relevant as we discuss more recent events today I'm going to pick up the history after World War two talking about some important episodes after the war but I will be getting in today to the beginnings of the crisis and so the latter part of today's lecture and all of next week will be about the crisis now as we go along I just want make sure you you keep your eye on the ball somatically speaking the two basic ideas the two basic missions of a central bank our first macroeconomic stability maintaining stable growth and keeping inflation low and stable and of course as you know the principal policy tool for maintaining macroeconomic stability is monetary policy in normal times the Fed or other central bank's will use open market operations purchases and sales of securities in markets to move interest rates up or down and in doing so try to create a more stable macroeconomic environment so that's an important part of any central bank's mission the other part of its mission though is financial stability central banks are focused on trying to ensure that the financial system is functioning properly and in particular they want to prevent if possible and if not to mitigate the effects of a financial crisis or financial panic and we talked last time about the lender of last resort function the notion that in a financial panic a central bank can follow budgets rule of lending freely against good collateral at a penalty rate and that by providing short-term credit to financial institutions a central bank can offset the effects of a run or a panic and the accompanying damage to the financial system in the economy but let's move ahead and talk a little bit about the history we left off at World War two which ended the depression which led to a sharp drop in unemployment as people were put to work building munitions and serving the homefront now one of the aspects of wars that economists pay attention to is how Wars get financed and normally wars are financed very substantially by borrowing and this was this was not a surprise u.s. national debt was built up quite substantially during World War two to pay for the war and the Fed in cooperation with the Treasury used its ability to manage interest rates to keep interest rates low so as to make it cheaper for the government to finance World War two so that was the role of the Fed during the war now after the war ended the debt was still there the government still worried up paying the interest on the national debt which was at a very high level and so there was considerable pressure on the Fed to keep interest rates low even after the war but there was a drawback to that which is that if you keep interest rates low even as an economy is growing and recovering you're risking an overheating economy you're risking inflation so by 1951 the Fed was very concerned about inflation prospects in the United States and after a series of complex negotiations the Treasury agreed to end the arrangement and let the feds that interest rates independently as needed to achieve economic stability and that agreement was called the Fed Treasury accord of 1951 it was very important because it was the first clear acknowledgment by the government that the Federal Reserve should be allowed to operate on an independent basis and today around the world there's you know a very strong consensus that central banks that operate independently will deliver better results than those which are dominated by the government in particular a central bank which is independent can ignore short-term political pressures for example the to pump up the economy before an election and in doing so it can take a much longer perspective and get better results and the evidence for this is quite strong and as a result major central banks around the world are typically independent which means that they make their decisions irrespective of short-term political pressures now in the 1950s in the 1960s the primary concern of of the Fed was macroeconomic stability you see a picture there of the Chairman William McChesney Martin he was chairman from 1951 to 1979 teen years he was the leader of the Fed chairman Greenspan's term ended at 18 years six months he unfortunately didn't break the record I know he was very disappointed about that but in that case we had to Federal Reserve Chairman who between them accounted for more than 37 years of leadership at the Fed during the post-war period now monetary policy during the 50s and early 60s was relatively simple the economy was growing again as after World War one after World War two the US economy was dominant the fears about a renewed depression had not come