Mondustrial Policy

  

Categories: Regulations

What do we get when we take federal monetary policy and apply it (along with a little ketchup) to industry? That’s right: we get “mondustrial policy,” a combo of the words “monetary” and “industrial” that was coined by Stanford economics professor John Taylor back in 2007 when the Great Recession was just getting its economically depressed party started.

Let’s be clear: Dr. Taylor did not intend the word “mondustrial” to be flattering. He’s a big critic of what the Federal Reserve did with interest rates prior to the 2007-08 housing crash (he says they didn’t raise them far or fast enough). He argues that the Fed’s efforts to support the mortgage industry actually helped contribute to the subprime mortgage crisis. And then, when the crisis actually started happening, the Fed’s knee-jerk reaction was to slash interest rates—which only made everything worse.

His argument is that the Fed should stick to monetary policy and not try to get involved in industrial policy or implement “mondustrial policy,” as he calls it, because that’s not its job. The Federal Reserve should worry about the Federal Reserve, and the nation’s industries should take care of themselves.

Related or Semi-related Video

Finance: What is The Fed?1 Views

00:00

and finance Allah shmoop What is the Fed shmoop the

00:07

Fed A k a The Federal Reserve It's the central

00:11

bank of the United States and its independent of the

00:14

three branches of U S government and it's also responsible

00:17

for well the health of America's financial system More less

00:21

An apple a day keeps the USD looking a OK

00:25

by setting the country's monetary policy regulating financial institutions and

00:30

acting as a bank for the U S Treasury What

00:33

the Fed is central to the US economy and well

00:36

to the strength of the dollar You probably heard of

00:38

the Fed chair He's sometimes in the news since he's

00:41

well more or less the face of the Fed For

00:43

instance Ben Bernanke got a lot of screen time whether

00:46

he liked it or not since he was the Fed

00:49

chair during the two thousand eight financial crisis The Fed

00:52

chair and the vice chair are appointed by the president

00:54

to reign over the board of governors during the president's

00:57

four year term In total there are seven members on

01:00

the board of governors all appointed by the press and

01:03

confirmed by the Senate The Fed is supposed to be

01:05

independent of current political happenings and the current presidential administration

01:09

So all board members must pass muster through two out

01:13

of three U S Government branches All right well the

01:16

board of governors including the Fed chairman are the seven

01:19

head honchos of the Fed But the board of governors

01:22

aren't the only ones in club fed All right well

01:24

we also have 12 Federal Reserve banks that span the

01:27

country Each Federal Reserve Bank is responsible for a region

01:31

of the US So the Federal Reserve banks are kind

01:34

of like the nervous system of the federal Fed branching

01:37

out to reach all areas of the U S They're

01:39

located in major cities in the regions that they serve

01:42

in each of the Reserve Bank's do their own day

01:44

to day thing But they're supervised by the Board of

01:47

Governors while the Board of Governors is supervising 12 Fed

01:50

Reserve banks that 12 Fed Reserve banks or supervising other

01:53

banks called member banks which include all national banks So

01:57

you know most banks we'll reserve banks lend money to

02:00

banks to accept deposits keeping liquidity minimum standards and then

02:04

these banks enforce compliance of laws designed to protect consumers

02:09

like things like the fair credit lending laws and all

02:12

that kind of stuff We'll reserve banks are weird since

02:15

they're kind of private and kind of public What economists

02:17

call Quays I governmental They're supposed to function publicly supervising

02:22

the commercial banks in their area and everything but they're

02:24

largely managed and funded privately Commercial banks in each region

02:29

hold stock in their regions Federal Reserve Bank which means

02:32

the reserve banks are essentially owned by commercial banks It's

02:36

the same idea that shareholders have those who own shares

02:38

of stock in a company owned that company well except

02:41

that reserve banks are supposed to be keeping a regulatory

02:45

eye on these banks that are funding them So the

02:47

reserve banks are funded by the banks that they're policing

02:51

Yeah maybe conflict of interest there Why Well because they're

02:54

not supported by tax dollars They're supported by the interest

02:58

they collect from commercial banks Well remember when the Fed

03:01

was made it was designed to be separate from the

03:03

current politics and from the rest of governments The idea

03:07

is that no matter which way the political wind is

03:09

blowing the Fed can remain strong and independent you know

03:12

the Beyonce away A lack of funding from the public

03:15

sector means that well they had to get it from

03:17

the private sector Reserve banks aren't like normal banks Each

03:21

Reserve Bank has its own nine member board of directors

03:24

Three of the directors were chosen by the Board of

03:26

Governors Up on High and the other six Reserve Bank

03:29

directors are elected by the member banks in their region

03:32

Yet reserve banks are funded by their member banks that

03:35

they regulate And member banks also elect 2/3 of reserve

03:39

bank directors which means member banks have a big hand

03:42

in well basically saying who regulates them And if that's

03:46

not complicated enough yeah we're gonna keep going There's one

03:49

more piece to the Fed puzzle We've got the board

03:51

of governors the Reserve banks and finally the funk also

03:55

known as the Federal Open Market Committee Will the funk

03:59

or FOMC is what makes changes happened The policymaking branch

04:03

of the Fed now the FOMC isn't exactly its own

04:06

branch It's made up of people from the board of

04:09

governors and the president of the Reserve Bank's Well the

04:12

chair of the board of governors is usually the chair

04:15

of the bomb But don't worry there is some democracy

04:18

to it The epilepsy also includes all the board of

04:20

governors as voting members plus the president of the Federal

04:23

Reserve Bank of New York Right that one special It's

04:26

the on ly reserve bank prez who always gets a

04:28

vote There are four other voting spots in the FOMC

04:31

that the remaining 11 Reserve Bank president's fill by battling

04:36

it out Thunderdome style Yeah okay while the other four

04:39

voting spots are filled by the remaining 11 Reserve Bank

04:41

president's taking turns serving for one year at a time

04:45

While seven Reserve Bank presidents don't get to vote at

04:48

any given time they still take part in the FOMC

04:51

meetings taking all things monetary policy into account when interest

04:56

rates go up or down It's because the FOMC is

04:58

doing their monetary policy jamboree Okay well the board of

05:01

governors the reserve banks and how they all come together

05:04

in the Federal Open Market Committee make up the Fed

05:07

The Fed does not mean the federal government and is

05:09

actually designed to be separate from the federal government Even

05:12

some politicians have made that mistake before Nathan Oh it

05:14

wasn't pretty While the Fed functions is a commercial bank

05:17

hall monitor and piggy bank for the U S Treasury

05:20

the main thing the Fed is known for in the

05:22

public eye is changing of interest rate The general idea

05:26

of interest rate tinkering is that the process ripples outward

05:30

affecting the entire economy of the U S and the

05:33

world When the Fed charges higher interest rates to member

05:36

banks well member banks in turn charge higher mortgages car

05:39

loans credit card rates to consumers When things are more

05:42

expensive consumer spending generally slows when the Fed makes it

05:46

cheaper from member banks to borrow well Interest rates are

05:48

low then and that usually increases consumer spending Through this

05:52

ripple effect of interest rate Pickering's and controlling the money

05:55

supply the Fed aims to keep prices stable and unemployment

05:58

low You know the stuff of monetary policy well Besides

06:01

conducting monetary policy the Fed is also supposed to keep

06:04

financial system stable to police commercial banks and to protect

06:08

consumers from predatory banking practices or anything It's just not

06:12

fair While it's supposed to work that way it doesn't

06:14

always since member banks fund and elect the same Reserve

06:17

Bank reps who were supposed to be policing them While

06:20

they're about to be you know conflicts of interest There

06:23

are some rules in place to prevent this but they

06:25

aren't always followed For instance in two thousand eight chairman

06:27

of New York's Reserve Bank the one special Reserve bank

06:30

that always gets to vote in the bomb was also

06:33

on the Goldman Sachs board of directors and they invested

06:36

had a whole bunch of stock in Goldman Sachs And

06:39

that guy wasn't alone Have also been Reserve Bank board

06:42

of directors who've been affiliated with Citigroup JPMorgan Chase and

06:45

other financials institutions while serving affiliation with commercial banks while

06:49

also working for Reserve Bank is the kind of conflict

06:52

of interest that could potentially interfere with the Fed's role

06:54

as an enforcer of financial regulations You know the feds

06:58

consumer protecting hall monitor duties and all But like the

07:01

federal government the Fed isn't perfect but it's always God

07:04

and it's carried us pretty far thus far The US

07:06

dollar remains the most powerful currency in the world thanks

07:09

to economic growth and currency stabilization and the fact that

07:13

it's been six days a week doing powerlifting at the

07:15

gym

Up Next

Finance: What is the Federal Funds Rate?
21 Views

What is the Federal Funds Rate? The federal funds rate is the interest rate used for overnight lending between banks. The amount banks are able to...

Finance: What is the Federal Housing Authority (FHA)?
11 Views

What is the Federal Housing Administration (FHA)? The FHA is a government agency that sells mortgage insurance. People who take out mortgage loans...

Find other enlightening terms in Shmoop Finance Genius Bar(f)