American Recovery And Reinvestment Act

  

Categories: Econ, Careers

An economic stimulus package passed in 2009 in direct response to “The Great Recession” spurred by the financial crisis of 2007-08. Estimated to have cost between $787 and $831 billion, the ARRA was predicated on the economic theory of John Maynard Keyes, which suggests that governments can stem recessionary periods by boosting near-term spending.

In 2014, most economists agreed that it kinda worked more than it didn’t...irrefutable proof that, when you own your very own island nation and it hits a slump, you should remember to spend your way out of it. Oh and whose money did they spend? Our kids'.

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Finance: What are open market operations...1 Views

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finance a la shmoop what are open market operations om o--'s are kind of the

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financial Navy SEALs affecting economic world peace in the daily wrestling match [Navy SEALs in a line]

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between inflation and interest rates and the global appetite for credit risk will [boxing match]

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the open market operations are active actual things that the government does

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to affect the price of renting money and/or the ability of Joe Sixpack and

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corporate America to rent that money well specifically there exists a group

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of well seven plus angry people who run the reserve Open Committee which buys [angry people in an office meeting]

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and sells government securities namely tea bills notes and bonds in order to

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regulate and control the supply of money to well basically well-heeled investors

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yes hello China thanks for buying so much so how does this work well in any

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given month the US government transacts in hundreds of billions of dollars of

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debt instruments gas tea bills notes and bonds and all that stuff yeah that's all [notes and bonds on a table]

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those guys either as a buyer of them or a seller of them sounds like a very [Uncle Sam buying or selling bonds]

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strange process in that paper is paper right and a t-bill can be liquidly

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converted into cash right so you'd think that the government simply borrowing [bond put in a blender and turns into dollar bills]

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from Peter to pay Paul and then doing the reverse what really wouldn't matter

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at all or at least certainly matter that much to interest rates and the liquidity

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and the overall health of our multi trillion dollar economy right but maybe

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surprisingly it actually has a huge effect mainly because that last 2% of

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people needing cash or wanting to invest cash are transacting in the market while

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the remaining 98% or so of the world well he just kind of sits there happy

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with the poker hand that they've been dealt cash wise at least this month

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relatively small percentage changes of the total like quote only a few hundred

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billion dollars unquote actually have a dramatic effect on liquidity in the

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marketplace think about it like the one guy on the freeway who has to drive in

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the middle lane going 42 miles an hour and well then everyone else backs up [guy driving slowly on freeway]

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it's a kind of so when the government wants to increase

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the supply of money or cash or liquidity so that borrowers have an easier time

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getting banks or other lending institutions like savings and loans to

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loan them money while the government then buys securities or said another way

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the government takes its cash stash and spreads it around to buy things back

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like tea bills notes in the various flavors of bonds right so that's

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government cash then going out into the marketplace so Joe Sixpack can stare at [piles on money in a bakery window]

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it hungrily and the opposite works the same way when the government wants to

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restrict the supply of cash like maybe it's worried about inflation or an

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overheated borrowing economy like we have too much leverage out there well it

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then sells a bunch of debt instruments soaking up like a financial sponge the

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excess cash in the marketplace and replacing it with lovely pieces of paper

02:53

with a big fat IOU on the cover right that's a t-bill so this is the

02:57

playing field in which open market operations happen and specifically when [baseball breaks screen]

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the Fed buys securities it usually buys them from banks injecting loads of cash

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into the bank who then feels pressure to get that cash money loaned out through

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little and big business and joke consumer alike think about it like dole

03:14

pineapple has just injected 18 million pineapples at a really cheap price into [pineapples dumbed into street]

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the chain of Safeway stores well safe way is the retailer of the pineapples

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obtained wholesale from Dole in the same way the cash was obtained by banks

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wholesale from the government so now there's a big fat pressure to get those

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pineapples sold before they rot or at least create a drag on earnings or [pineapples on store shelf]

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inventory turnover ratios that grocery stores and banks care so much about well

03:43

with more access to capital and more liquid availability of cash banks often

03:47

create their own equivalent of Macy's white-flowered a sales where some lucky

03:52

borrower gets their money at demel 3.7 1/2 percent instead of three point nine

03:57

nine eight percent and those twenty eight ish basis points add up to a small

04:01

fortune over time and in case you're wondering the same is true in Reverse [money entering and leaving vault]

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