Thursday, June 23, 2011

I need some help with understanding "Economics" - please help!

Well, the Federal Reserve Board met on Tuesday and Wednesday this week, and, right afterwards, Chairman Ben Bernanke commented on the economy. Today is the “day after”, and I just noticed that the Dow Jones averaged “plunged nearly 200 points at the open.” Doesn’t sound like there’s a good dose of confidence in the investor arena.

There’s an article on Bloomberg this morning, and I’m going to mention the title and copy into this post a few of the paragraphs that were in that article …. then, later on, I’m going to ask for your help!

Title of the article on Bloomberg:

Bernanke Leaves Door Open to Further Easing

By Scott Lanman and Jeannine Aversa - Jun 23, 2011 12:00 AM ET

Here are a few of the paragraphs that were in that article:

Federal Reserve Chairman Ben S. Bernanke left the door open to a fresh shot of monetary stimulus should the economic rebound he’s predicting fail to materialize.

The Fed would be “prepared to take additional action, obviously, if conditions warranted,” including the purchase of more Treasury securities, Bernanke said yesterday after U.S. central bankers met in Washington. The economy will probably overcome constraints from elevated energy prices and Japan- related disruptions to manufacturing, he said. Still, declining home prices, high unemployment and weaknesses in the financial system may restrain the recovery in the longer term, he said.

The U.S. economy grew at an annual rate of 1.8 percent in the first quarter, down from 3.1 percent in the fourth quarter, and recent data have shown manufacturing and consumer and business sentiment weakening.

“We don’t have a precise read on why this slower pace of growth is persisting,” Bernanke said. Referring to “frustratingly” slow job growth and weakness in the financial and housing industries, Bernanke said “some of these headwinds may be stronger and more persistent than we thought.”

U.S. employers added 54,000 jobs in May, down from 232,000 in April, while the jobless rate climbed to 9.1 percent, the second straight increase after dropping 1 percentage point since November in the biggest four-month decline since 1984.

“The camel’s nose is under the tent” for additional bond purchases, said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “Bernanke acknowledged a less-than-ideal recovery and left the door open for potentially more accommodation should it be required.”

Bernanke said that to further stimulate the economy the Fed could buy more bonds or cut the interest rate it pays banks on excess reserves held at the central bank. It could also pledge to hold interest rates at record lows for a longer period of time, he said.

Okay, here’s where I need some help!

I’m the author of “Reprographics 101”, and one can, therefore, assume that I know a lot about the reprographics business and industry.

This blog isn’t called “Economics 101”, and there’s a very good reason for that! I barely passed the Economics courses I took in college. So, one could rightly conclude that, when it comes to understanding “Economics”, I’m definitely “challenged.”

In the last paragraph of the “article” I posted certain paragraphs from, the authors said that Bernanke said:

… further stimulate the economy,

a) the Fed could buy more bonds, or

b) the Fed could cut the interest rate it pays banks on excess reserves held at the central bank, or

c) the Fed could also pledge to hold interest rates at record lows for a longer period of time

Would someone please kindly educate me, in detail, as to how each of these actions “stimulate” the economy? I would be immensely appreciative of your assistance on this, since, as I said, I am definitely challenged when it comes to understanding Economics.

I kind of understand that holding interest rates at record lows helps banks make money. They borrow at a cheap cost and lend that money out at a higher cost. But, that assumes that banks are willing to lend money. Credit has tightened, in spite of the Fed’s actions to “keep interest rates low.”

How does the “Fed buying more bonds” help stimulate the economy?

How does the “Fed cutting the interest rate it pays banks on excess reserves” stimulate the economy?

Thank you.

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