Tuesday, August 28, 2007

Monetary Policy and Financial Turbulence

The past couple of weeks have certainly been interesting/exciting (choose one) for just about everyone. But I would think this was especially so for economics and finance teachers. I know that when I was teaching in the late 1970s and early 1980s, nothing made the class more interesting for me as well as for the students as a sense of immediacy. The knowledge that what was happening was relevant to just about everything in the classroom made the subject seem more valuable. In fact, some folks involved in the Fed Challenge competition have wondered what it would have been like if this had happened four months ago or eight months in the future.

But, concurrent with the turbulence has been the prodigious output of fellow-bloggers. For the teacher who wants to use the recent financial roller-coaster as an opportunity to reach students, there has been a wealth of information that is understandable and good. And that's not something that can always be said.

The first post I would call to your attention is on the Vox site by Stephen Cecchetti, currently at Brandeis University and formerly Director of Research at the Federal Reserve Bank of New York. His post is in a "Q&A" format and gives a solid explanation of why the Fed lowered the primary lending rate (read discount rate for those of us "old schoolers") instead of Fed Funds. While it might be a bit dense for some high school classes, many should be able to get through this with a bit of help. And for those of you might want to brush up on the basics before attacking this with your students, I can recommend the Fed Reserve System's education site.

For those of you looking for a discussion on whether or not the Fed should have intervened, I will direct you to the Becker-Posner blog. Dr. Becker is a Nobel Prize-winning economist at the University of Chicago. Judge Posner is U.S. Circuit Court of Appeals judge and lecturer at the University of Chicago. They have one of the more informative and interesting web sites when it comes to jointly discussing issues of the day. Their views on the current unease can be found here for Dr. Becker and here for Judge Posner. Both of them generally oppose anything that resembles a bailout; maintaining that the Fed's primary role is macroeconomic unless a situation threatens the larger macro economy.

Finally, there are two posts on the Aplia Blog site, which offers information and discussion questions designed especially for the classroom. The post on August 15, Central Banks to the Rescue explains how central banks around the world moved to prevent a liquidity crisis. The post on August 22, Lender of Last Resort focused on the role of the Federal Reserve. In my opinion, both tie in well with Cecchetti's post.

I hope you have time to check these out. I think you will be amply rewarded in terms of information and ideas for your classroom discussion. Please comment on your experiences with this information or this topic.

1 comment:

Julie said...

The Fed cut the discount rate the first day of AP Macro class. It completely altered my lesson plan and engaged the kids immediately even though they knew only that a member of this year's national finalist Fed Challenge team came flying into our classroom announcing the news. Yet with a simple explanation, the students became inquisitive and interested.
Cecchetti's blog was just what was needed to counteract the noise level on CNBC. Thank you for the direction to the other blogs. It seems Tim, that knowledge of the role of the Fed is "scarce". Your blogs will help fill the void. I dare say, the students you educated through the Fed Challenge program at the Chicago Fed understand the role of the Fed and they certainly know the difference between the discount rate and the fed funds rate. They also understand open market operations.
Glad to see your blog is back.