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'.
Related or Semi-related Video
Finance: What are open market operations...1 Views
finance a la shmoop what are open market operations om o--'s are kind of the
financial Navy SEALs affecting economic world peace in the daily wrestling match [Navy SEALs in a line]
between inflation and interest rates and the global appetite for credit risk will [boxing match]
the open market operations are active actual things that the government does
to affect the price of renting money and/or the ability of Joe Sixpack and
corporate America to rent that money well specifically there exists a group
of well seven plus angry people who run the reserve Open Committee which buys [angry people in an office meeting]
and sells government securities namely tea bills notes and bonds in order to
regulate and control the supply of money to well basically well-heeled investors
yes hello China thanks for buying so much so how does this work well in any
given month the US government transacts in hundreds of billions of dollars of
debt instruments gas tea bills notes and bonds and all that stuff yeah that's all [notes and bonds on a table]
those guys either as a buyer of them or a seller of them sounds like a very [Uncle Sam buying or selling bonds]
strange process in that paper is paper right and a t-bill can be liquidly
converted into cash right so you'd think that the government simply borrowing [bond put in a blender and turns into dollar bills]
from Peter to pay Paul and then doing the reverse what really wouldn't matter
at all or at least certainly matter that much to interest rates and the liquidity
and the overall health of our multi trillion dollar economy right but maybe
surprisingly it actually has a huge effect mainly because that last 2% of
people needing cash or wanting to invest cash are transacting in the market while
the remaining 98% or so of the world well he just kind of sits there happy
with the poker hand that they've been dealt cash wise at least this month
relatively small percentage changes of the total like quote only a few hundred
billion dollars unquote actually have a dramatic effect on liquidity in the
marketplace think about it like the one guy on the freeway who has to drive in
the middle lane going 42 miles an hour and well then everyone else backs up [guy driving slowly on freeway]
it's a kind of so when the government wants to increase
the supply of money or cash or liquidity so that borrowers have an easier time
getting banks or other lending institutions like savings and loans to
loan them money while the government then buys securities or said another way
the government takes its cash stash and spreads it around to buy things back
like tea bills notes in the various flavors of bonds right so that's
government cash then going out into the marketplace so Joe Sixpack can stare at [piles on money in a bakery window]
it hungrily and the opposite works the same way when the government wants to
restrict the supply of cash like maybe it's worried about inflation or an
overheated borrowing economy like we have too much leverage out there well it
then sells a bunch of debt instruments soaking up like a financial sponge the
excess cash in the marketplace and replacing it with lovely pieces of paper
with a big fat IOU on the cover right that's a t-bill so this is the
playing field in which open market operations happen and specifically when [baseball breaks screen]
the Fed buys securities it usually buys them from banks injecting loads of cash
into the bank who then feels pressure to get that cash money loaned out through
little and big business and joke consumer alike think about it like dole
pineapple has just injected 18 million pineapples at a really cheap price into [pineapples dumbed into street]
the chain of Safeway stores well safe way is the retailer of the pineapples
obtained wholesale from Dole in the same way the cash was obtained by banks
wholesale from the government so now there's a big fat pressure to get those
pineapples sold before they rot or at least create a drag on earnings or [pineapples on store shelf]
inventory turnover ratios that grocery stores and banks care so much about well
with more access to capital and more liquid availability of cash banks often
create their own equivalent of Macy's white-flowered a sales where some lucky
borrower gets their money at demel 3.7 1/2 percent instead of three point nine
nine eight percent and those twenty eight ish basis points add up to a small
fortune over time and in case you're wondering the same is true in Reverse [money entering and leaving vault]
Up Next
Who was John Maynard Keynes, and how did he contribute to economics?
The Federal Open Market Committee's purpose is to manage financial outcomes through monetary policy.