31
Money, Banking, and Financial Institutions
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
AGENDA Tues 3/15
• Team Teaching: CH 31-32
• P3: Allan, Ezra, George
• P5: Ms. K (no surprise)
• On Deck: CH 33 (after spring break)
• P3: Dulce, Fatima
• P5: Ms. K (we’ll see…) • QOD # 23: Money, money, money
• HW: Read pp 655-667 Q#4,5,6 Due Thurs 3/17
• Review CH 32 P#4,5 (Due Mon 3/21)
• Study for Midterm 3/24
LO1 29-2
QOD #23: Money Money Money
• Assume that the following asset values (in millions of
dollars) exist in Ironmania: • Federal Reserve Notes in circulation = $700;
• Money market mutual funds (MMMFs) held by individuals = $400;
• Corporate bonds = $300;
• Iron ore deposits = $50;
• Currency in commercial banks = $100;
• Savings deposits, including money market deposit accounts (MMDAs) =
$140;
• Checkable deposits = $1500;
• Small-denominated (less than $100,000) time deposits = $100;
• Coins in circulation = $40.
• a. What is M1 in Ironmania? b. What is M2 in Ironmania
QOD #23: Money Money Money Solution
• (a) M1 = $2240 (= $700 Federal Reserve Notes +
$1500 checkable deposits + $40 coins)
• (b) M2 = $2880 (= $2240 M1 + $140 savings and
MMDAs + $100 small-denominated time deposits +
$400 MMMFs)
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-what is most liquid?
LO1 31-5
Money Definition
LO1
M1 M2
•Currency
•Checkable deposits
•Institutions offering
checkable deposits
•Commercial banks
•Savings and loan
associations
•Mutual savings banks
Credit unions
•M1 plus near-monies-??
•Savings deposits
including money market
deposit accounts (MMDA)
•Small-denominated time
deposits
•Money market mutual
funds (MMMF)
31-6
What “Backs” the Money Supply?
• Guaranteed by government’s ability to keep value stable
• Money as debt
• Paper money is the circulating debt of the Federal Reserve.
• Checkable deposits are the debts of commercial banks and
thrift institutions.
• NOT BACKED BY GOLD
• The supply of money would vary with the amount of
gold available.
• Monetary authority attempts to provide the amount of
money needed for the volume of business activity
that will promote full employment.
• Why is money valuable?
• Acceptability-we accept it
• Legal tender-valid and LEGAL means of payment
• Relative scarcity- to be exchanged for goods and services in the
future-WHAT IF IT WAS UNLIMITED?? LO2 31-7
What “Backs” the Money Supply?
• Prices affect purchasing power of money- V=1/P
• Price Level=1 Price Level=1.03
• Hyperinflation renders money unacceptable
• Stabilizing money’s purchasing power
• Intelligent management of the money supply –
monetary policy
• Appropriate fiscal policy-coincides with
monetary policy of limiting inflation.
LO2 31-8
Federal Reserve - Banking System
• Historical background
• Board of Governors
• 12 Federal Reserve Banks
• Serve as the central bank
• Quasi-public banks-owned by the
private commercial banks in its
district, but regulated by the Board
of Governors.
• Banker’s bank
LO3 31-9
Federal Reserve – Banking System
Commercial Banks
Thrift 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 31-10
Federal Reserve – Banking System
LO3
The 12 Federal Reserve Banks
31-11
Federal Reserve – Banking System
• Federal Open Market Committee
• Aids Board of Governors in
setting monetary policy
• Conducts open market
operations
• Commercial banks and thrifts
• 6,800 commercial banks
• 8,700 thrifts
LO3 31-12
Federal Reserve Functions
• Issue currency
• Set reserve requirements
• Lend money to banks
• Collect checks
• Act as a fiscal agent for U.S.
government
• Supervise banks
• Control the money supply
LO4 31-13
Federal Reserve Independence
• Established by Congress as an
independent agency
• Protects the Fed from political
pressures
• Enables the Fed to take actions to
increase interest rates in order to
stem inflation as needed
LO4 31-14
Financial Institutions
World’s 12 Largest Financial Institutions, 2009
Royal Bank of Scotland (UK)
Barclays (UK)
Deutsche Bank (Germany)
BNP Paribas (France)
HSBC Holdings (UK)
JPMorgan Chase (US)
Credit Agricole (France)
Citigroup (US)
Mitsubishi UFJ (Japan)
UBS (Switzerland)
ING Group (Netherlands)
Bank of America (US)
0 1.5 2.5 3.5
Source: Forbes Global 2000, http://www.forbes.com
Assets (Trillions of U.S. Dollars)
LO4 31-15
The Financial Crisis of 2007 and 2008
• Mortgage Default Crisis
• Many causes
• Government programs that encouraged home
ownership
• Declining real estate values
• Bad incentives provided by mortgage-backed
bonds
• Sub-prime loans?
• Banks
• Sold mortgages to investors
• Lent the money to the investor
• Bought them as well
• AIG-insured them with default swaps
LO5 31-16
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
• “Underwater” homeowners
abandoned homes and mortgages
LO5 31-17
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 31-18
The Financial Crisis of 2007 and 2008
• Troubled Asset Relief Program
(TARP)
• Allocated $700 billion to make
emergency loans
• Saved several institutions from
failure
LO6 31-19
The Financial Crisis of 2007 and 2008
• The Fed’s lender-of-last-resort
activities
• Primary Dealer Credit Facility
• Term Securities Lending Facility
• Asset-Backed Commercial Paper
Money Market Mutual Fund
Liquidity Facility
• Commercial Paper Funding Facility
LO6 31-20
The Financial Crisis of 2007 and 2008
• Money Market Investor Funding
Facility
• Term Asset-Backed Securities Loan
Facility
• Interest Payments on Reserves
LO6 31-21
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