Money, Banking, and Financial Institutions 14 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill...
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Transcript of Money, Banking, and Financial Institutions 14 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill...
Money, Banking, and Financial Institutions
14
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Functions of Money
• Medium of exchange• Used to buy/sell goods
• Unit of account• Goods valued in dollars
• Store of value• Hold some wealth in money form
• Money is liquid
LO1
Liquidity
Refers to ability to use an asset as a medium of exchange. The easier it is to convert to a medium of exchange, the more liquid.
LO1
Money Definition M1
• M1• Currency & coins• Checkable deposits
• Only the most liquid assets are included.
• Coins are token money• Excludes money held by government
and banks.
LO1
Money Definition M2
• M2 = M1 + near-monies (easily converted to be used as medium of exchange).• Savings deposits including money
market deposit accounts (MMDA)• Small-denominated time deposits• Money market mutual funds
(MMMF)
LO1
Money Definitions
LO1
What “Backs” the Money Supply
• Money as debt
• Stable value of money
• Acceptability
• Legal tender
• Relative scarcity
LO2
What “Backs” the Money Supply
• Prices affect purchasing power of money – inverse relationship• Hyperinflation renders money
unacceptable
• Stabilizing money’s purchasing power• Intelligent management of the money
supply – monetary policy• Appropriate fiscal policy
LO2
Federal Reserve - Banking System
• Historical background
• Board of Governors
• Basic policy making body of U.S. banking system.
• 7 members appointed by president
• 14 year terms, staggered
• Chair/Vice Chair 4 year terms.
LO3
Federal Reserve - Banking System
• 12 Federal Reserve Banks
• Serve as the central bank
• Quasi-public banks
•Public control, private ownership
• Banker’s bank
LO3
Federal Reserve – Banking System
Commercial BanksThrift Institutions
(Savings and Loan Associations,Mutual Savings Banks,
Credit Unions)
The Public(Households and
Businesses)
12 Federal Reserve Banks
Board of Governors
Federal Open Market Committee
LO3
Federal Reserve – Banking System
The 12 Federal Reserve Banks
Source: Federal Reserve Bulletin
LO3
Federal Reserve – Banking System
• Federal Open Market Committee
• Conducts open market operations
• Includes Board of Governors and 5 presidents of Federal Reserve Banks
LO3
Federal Reserve Functions
• Issue currency• Set reserve requirements• Lend money to banks • Check collection• Fiscal agent for U.S. government• Supervise banks• Control the money supply
LO4
Federal Reserve Independence
• Established by Congress as independent agency
• Protects the Fed from political pressures
• Enables Fed to take actions to increase interest rates to stem inflation as needed
LO4
The Financial Crisis of 2007 and 2008
• Mortgage Default Crisis
• Many causes
• Government programs encouraged home ownership
• Declining real estate values
• Bad incentives provided by mortgage-backed bonds
LO5
The Financial Crisis of 2007 and 2008
• Securitization- the process of slicing up and bundling groups of loans into new securities
• As loans defaulted the system collapsed
• AIG sold collateralized default swaps to insure bad loans
• “Underwater” homeowners abandoned homes and mortgages
LO5
The Financial Crisis of 2007 and 2008
• Failures and Near-Failures of Financial Firms
• Countrywide-second largest lender
• Washington Mutual-largest lender
• Wachovia
• Other firms came close
LO5
The Financial Crisis of 2007 and 2008
• Troubled Asset Relief Program (TARP)• Allocated $700 billion to make
emergency loans
• Saved several institutions from failure
• Created moral hazard
LO6
Post-crisis U.S. Financial Services
• Wall Street Reform and Consumer Protection Act
• Passed to help prevent many of the practices that led to the crisis
• Critics say it adds heavy regulatory costs
LO7