Go To The Standard And Poor's Website

Go To The Standard And Poors Website Httpwwwstandardandpoorsc

1. Go to the Standard and Poor’s website ( ) and click on “Ratings Actions”. Find a country or corporation whose debt rating has recently changed. Explain briefly why S&P made the change. Please also include a printout of the information from the website.

2. Suppose someone makes the following statement: “I just bought my first home in 2008. Economists are now projecting very low inflation in 2015 and continuing low inflation going forward. I really hope that they are incorrect.” Why would someone say this? Why does it make sense?

3. If the Federal Reserve increases the discount rate, what happens to the federal funds rate? Use the supply and demand analysis of the market for reserves to explain your answer. (You must DRAW out the graphs)

4. “The FOMC meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are released three weeks after the meeting; however, a brief press release is made available immediately. Find the schedule of minutes and press releases at .

a. When was the last scheduled meeting of the FOMC? When is the next meeting?

b. Review the press release from the last meeting. What did the committee decide to do about short-term interest rates?

c. Review the most recently published meeting minutes. What areas of the economy seemed to be of most concern to the committee members?

5. In the book The Big Short there are many things in the first 8 chapters that you may find shocking regarding the mortgage industry, mortgage bonds and/or the way Wall Street operates. Discuss three things from the first 8 chapters that you found surprising. Please discuss each somewhat in depth, identifying why it surprised/shocked you and what your initial opinion was of the event/policy.

Paper For Above instruction

The assignment encompasses several critical aspects of understanding financial markets, economic policy, and the implications of banking and mortgage industry practices. This essay explores recent credit rating adjustments by Standard & Poor’s, the relationship between interest rates and economic expectations, the Federal Reserve's monetary policy tools, and insights from Michael Lewis's "The Big Short."

Firstly, examining the recent credit rating change on the Standard & Poor’s website illuminates how credit agencies assess the creditworthiness of entities and the factors influencing such evaluations. For instance, a rating downgrade of a country such as Argentina might be linked to political instability and default risk, or in the case of a corporation like Ford, issues related to declining sales or financial stability. Such rating changes are made based on economic data, fiscal policies, or global economic conditions (Standard & Poor’s, 2023). Including a printout of the rating action provides tangible evidence of this process, illustrating the specific reasons cited by S&P, such as deteriorating fiscal metrics or external economic shocks.

Secondly, the statement about low inflation projections and personal housing decisions reveals the intertemporal considerations and expectations embedded within consumer behavior. Someone who bought their first home in 2008, amid a financial crisis, might worry about persistent low inflation because low inflation reduces the real return on savings and can be associated with economic stagnation. Economists’ projections of low inflation in 2015 and beyond might suggest a weak economic environment—possibly a liquidity trap—where monetary policy becomes less effective (Mankiw, 2020). This scenario could cause concern about deflation or sluggish growth, which has implications for mortgage repayment costs, savings, and investment.

Thirdly, analyzing the impact of an increase in the Federal Reserve’s discount rate demonstrates the interconnectedness of monetary policy instruments. An increase in the discount rate typically reduces the amount of reserves banks hold, leading to a higher equilibrium for the federal funds rate. Using supply and demand graphs, an increase in the discount rate shifts the supply curve of reserves to the left, decreasing reserves and raising the federal funds rate (Cecchetti et al., 2019). This relationship is crucial because it influences lending, liquidity, and overall economic activity.

Next, the Federal Open Market Committee (FOMC) schedules regular meetings to evaluate economic conditions and adjust policy accordingly. According to the Federal Reserve’s schedule (Federal Reserve, 2023), the last meeting occurred in March 2023, with the next scheduled for May 2023. The press releases following these meetings often indicate whether the FOMC intends to raise, lower, or maintain interest rates. Recent statements have shown a cautious stance, emphasizing the need to balance inflation control with economic growth (FOMC, 2023).

Content analysis of the most recent meeting minutes reveals the main concerns of committee members, including inflation pressures, labor market conditions, and global economic uncertainties. Members are particularly attentive to inflation trending above target levels, potential supply chain disruptions, and geopolitical risks impacting economic stability (Federal Reserve, 2023). These concerns guide their policy decisions, which aim to stabilize prices without dampening growth significantly.

Finally, “The Big Short” offers a revealing critique of financial practices leading to the 2008 crisis. Three shocking revelations include the widespread use of mortgage securitization, the conflicts of interest among rating agencies, and the manipulation of the mortgage market. Firstly, the significant role of mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) in spreading risk was surprising because it obscured the real financial liabilities from investors (Lewis, 2010). Initially, I thought MBS were a way to spread risk, but the reality was more complex, with excessive reliance on rating agencies' assessments.

Secondly, the conflict of interest involving rating agencies, which are paid by the issuers they rate, was eye-opening. It suggested that ratings could be manipulated to favor issuers, inflating the perceived safety of securities that were actually risky (Lewis, 2010). This undermined trust in the ratings and contributed to the build-up of systemic risk.

Thirdly, the systemic efforts by Wall Street entities to find loopholes and exploit the mortgage market's complexity revealed a lack of ethical oversight. This behavior contributed directly to the crisis, emphasizing the importance of regulatory oversight and ethical standards in financial markets—lessons vital for preventing future crises. My initial opinion was one of disbelief and concern about the greed and recklessness displayed in the industry, underscoring the need for more stringent regulation and transparency (Lewis, 2010).

References

• Cecchetti, S. G., Schoenholtz, K. L., & Lecce, S. (2019). Money, Banking, and Financial Markets (from the latest edition). Pearson.
• Federal Reserve. (2023). Schedule of FOMC meetings. Retrieved from https://www.federalreserve.gov/monetarypolicy/fomc.htm
• Federal Reserve. (2023). FOMC statement and minutes. Retrieved from https://www.federalreserve.gov/monetarypolicy/fomc.html
• Lewis, M. (2010). The Big Short: Inside the Doomsday Machine. W. W. Norton & Company.
• Mankiw, N. G. (2020). Principles of Economics (8th ed.). Cengage Learning.
• Standard & Poor’s. (2023). Ratings Actions. Retrieved from https://www.standardandpoors.com