The Federal Reserve’s Impact on Financial Crises

Click here to read this paper, what I have worked all year on. It covers the Federal Reserve’s approach to the Great Depression and 2008 Recession, and how their solutions are applicable in future crises.

America’s Super-Bank

The Federal Reserve; you might have heard the term before on the news channel before. It seems to be part of the government, but do you really know what it is or does?

The Federal Reserve (Fed) is America’s central bank, an organization that oversees American banks and controls monetary policy. It exists primarily to be the lender of last resort, stabilize the economy, and prevent/mitigate financial crises. These crises are generally caused by a lack of confidence in the economy; when this weakness is present, the Fed is responsible for easing credit (lowering interest rates makes it easier to borrow money) and providing liquidity (making loans or buying bonds from banks, giving them immediate cash). The Fed also works with the executive branch to stimulate the economy through the creation of jobs and the FDIC (Federal Deposit Insurance Corporation) to ensure citizens that bank deposits will be secure.

When my paper comes out, you can read a little bit more about how it helped America recover from the Great Depression and 2008 recession.

A Weaker Dollar

My dollar is strong. Does that mean it can beat up the yen or the pound? In a sense, yes. A strong currency is currency that has favorable exchange rates. In other words, the strong currency has more value abroad than domestically. A luxurious Spanish hotel and spa might be worth quite a sum of money, but with US dollars, it might be equivalent to the cost of a movie ticket (which could still be considered expensive at certain theaters). Of course, this value isn’t solely relevant to vacationers; the strength of a currency is significant in regards to international trade.

By definition, countries with strong currencies find it harder to export. Because a currency like the dollar has so much value, any price for a good is naturally higher in comparison to a weaker currency; in other words, a bad deal. Perhaps the contrast is easier to understand. Weaker countries, like China, have currencies that are literally worth less. Thus, they are willing to take lower prices for their goods because even with a lower price, the profit is enough to sustain them. These countries can still function, because the real costs of their goods and labor are lower.

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Hiatus

Hello readers,

You may not have noticed, but I haven’t posted in quite a while. That is because I’m working on a research paper regarding the Federal Reserve’s role in the recoveries after the Great Depression and 2008 recession. I’ll investigate briefly investigate the backgrounds of both events. How on earth did the world’s central banks miss the warning signs to these major events? Even if they didn’t what sorts of actions were being taken?

I will then track the recovery process. How long did recovery take? What made it possible? These are the questions I aim to answer in this paper, which should be available in its entirety by early June.  I hope you readers will enjoy what’s in store.

Thank You,

Minki Kim

An Intro to Market Crashes

While the stock market is a great way to store extra wealth, it’s also a terrifying place where you could lose it all. For example, if you buy 100 shares of Facebook, going for 130.99 as of today (a $13099.00 investment), and it went down a single dollar, you would lose $100 dollars instantly. Now, $100 is tiny compared to $13099. However, a $1 movement in the stock market isn’t anything alarming; when the market crashes, investors are liable to lose quite a bit more wealth from rapidly falling prices. Combine this with leveraging, and you can see why market crashes are so dangerous (leveraging is essentially borrowing money to invest. It can help you make higher returns, but is a poor decision right before a recession because the value of the securities you bought are lowered, while what you owe still stays the same; in other words, more money has to come out from your own pocket to cover the difference).

Why does the stock market even crash in the first place? When it comes down to it, these crashes happen because of lack of confidence in the market. If companies as a whole stop doing well, investors may collectively decide that they should sell their current positions. If too many of these investors sell, they’ll cause a run. In other words, the share price will plummet because of basic supply and demand laws; since there is high supply and little demand, the share prices will lower until they reach equilibrium. If the share price goes low enough, even more investors will cut their losses and sell, driving the share price even lower, and the cycle goes on. Granted, the share price will likely stay above a certain level because of the solvency of the company, but much wealth can be lost in these runs.

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How to Earn Free Money

Banks are cheating you. No, I’m not talking about the risky behaviors they’ve taken or the financial crises they’ve helped create. I refer to their incredibly low interest rates. While banks should be compensated for keeping your money safe, they can use said money by loaning it to other customers(mortgages and other investments). In other words, they make a killing from your money, while you get a measly 1% at best. However, there is an easier, far more profitable option found in the stock market.

We’ve discussed how owning pieces of a company does have some value. But, that was a bit of a lie. To get real exposure to individual companies, you need a ridiculous amount of money; for a single share of Google, nearly 800 dollars is going to come out of your pocket. So, is the stock game exclusively for the rich?

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An Intro to Stock Markets

Nearly everything we own was made by a company. The chairs we sit on, the computers we work with, and the phones we use; all were made by Ikea, Google, Apple, and the like. Even the foods we eat and the houses we live in came into being with the help of some large agriculture or construction firm. These companies are incredibly large and powerful, with billions in net worth. To the average citizen, they may seem overwhelming. How could anyone hope to control these huge forces responsible for shaping the economy?

However, anyone can own a company with just a couple dollars. That’s because companies, in order to raise money, will sell pieces of themselves in packages called “shares”. How much do these shares cost? A measure called book value shows what each share of a company should be worth based on factors like net profit and numbers of shares issued. However, their selling(market) value ultimately corresponds to what investors think the company is worth. New information like quarterly earnings is always being absorbed into the market and reflected in a stock’s price. For example, if a company releases an innovative new product, its market price will likely jump up because investors will predict that the company will do well and rush in to buy its stock(increasing demand pushes its value up). Investors should take note if a company’s book value and market value have a large discrepancy: the stock may be overvalued, and will likely become cheaper in the future.

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