Transcript What is Money? 1. A :

What is Money?
1. A medium of exchange:
Anything used to buy and sell goods and
services.
Goods it can purchase determines its value
2. A store of value:
An asset that allows people to transfer
purchasing power from one period to
another. Money doesn’t go bad.
3. A measure of value:
Units of measurement used by people
to post prices and keep track of
revenues and costs.
Converts to dollar value.
• Two basic measurements of the money
supply are M1 and M2:
• The components of M1 are:
• Currency
• Checking Deposits
(including demand deposits and
interest-earning checking deposits)
• Traveler's checks
• M2 (a broader measure of money) includes:
• M1,
• Savings,
• Time deposits under $100,000, and,
• Money mutual funds
The Supply of Money
• The third measurement of the money
supply is M3
• The components of M3 are:
• M2
• Time deposits, over $100,000 and,
• Foreign currency holdings in US banks
overseas
a
b
c
1. __ A $100 bill
2. __ A 6-month certificate of deposit
3.__ A $10,000 retirement account invested in
stocks
4. __ A $50 traveler’s check
5. __ A $5,000 American Express credit line
6. __ A quarter
7. __ A $1 off coupon clipped from the paper
8. __ A $100 balance in a checking account
9. __ A $200 balance in a savings account
10. __ A $10,000 treasury bill
The Changing Nature of M1
2001
Billions of $
1,200
Interest-earning
checkable deposits
$262
1,050
900
Total
$1,203
M1
750
$347
Demand
deposits
600
450
300
$594
Currency
150
1970
1975
1980
1985
1990
1995
2000
• In the 1980s, the introduction of interest-earning checking
accounts caused M1 to grow rapidly.
• In the 1990s, movement of funds from interest-earning
checking deposits to money market mutual funds caused M1
to contract. Thus, the M1 figures are not exactly comparable
across time periods.
Function:.
1. accept and maintain deposits.
2. make loans.
Types:.
1. Commercial Banks.
2. Savings and Loans
3. Credit Unions
4. Savings Banks.
1. Created in 1913
2. Responsible for:
a. overseeing the money supply
b. coordinating commercial bank
operations
c. regulating depository institutions
• The Board of
Governors is at the
center of the banking
system in the U.S.
• The seven members
of the Board of
Governors also serve
on the Federal Open
Market Committee
• The FOMC is a 12member board that
establishes Fed policy
regarding the buying
and selling of
government securities.
Federal Reserve
Board of Governors
7 members appointed by the president,
with the consent of the U.S. Senate
Open Market
Committee
Board of Governors &
5 Federal Reserve Bank
Presidents (alternating
terms, New York Bank
always represented).
12 Federal Reserve
District Banks
(25 branches)
Commercial Banks
Savings & Loans
Credit Unions
Mutual Savings Banks
The Public:
Households & businesses
1. Board of Governors –
7 members appointed by President
- 14 yr terms at 2 yr intervals for continuity & independence
-not more than one from each district
www.federalreserve.gov
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9
2
7
12
10
11
4
8
3
.
(Board of Governors)
5
6
• Each district bank monitors the commercial banks in their
region and assists them with the clearing of checks.
• The Board of Governors of the Federal Reserve System is
located in Washington D.C.
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2.____________________, ____________________
3.____________________
4._________________, _________________, _________________
5.________________, _________________, _________________
6._________________, ________________, _________________, _________________,
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7._________________, _________________
8._________________, ________________, _________________, _________________
9._________________, _________________
10._________________, ________________, ________________, __________________
11._________________, _________________, _______________,
12._________________, ________________, _________________, _________________,
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1 Boston
2 New York City, Buffalo
3 Philadelphia
4 Cleveland, Pittsburgh, Cincinnati
5 Richmond, Baltimore, Charlotte
6 Atlanta, Nashville, Birmingham, Miami,
Jacksonville, New Orleans
7 Chicago, Detroit
8 St. Louis, Louisville, Memphis, Little Rock
9 Minneapolis, Helena
10 KC, Denver, Omaha, Oklahoma City
11 Dallas, San Antonio, El Paso
12 SF, Salt Lake City, LA, Port., Seattle, Hono.,
2. Federal Open Market Committee
-12 members = 7 Governors (for majority) plus
5 Pres or VP from
1 NY
2 Bost, Phila, or Richmond,
3 Atl, Dallas, or StL
4 Minn, KC, or SF, LA
5 Clev, or Chicago
set policy on buying & selling bonds on open mkt
3. Federal Advisory Council outsiders
12 members - 1 each selected by Board of
each Region
Make sure they are following the rules
Makes clearing check easier
Replace money or increase or decrease money in circulation
Moves checks from region to region
Borrows, writes checks, takes deposits
Grandma in Hawaii sends
her Granddaughter in New York
a check for $50.00.
Her Granddaughter
deposits the $50.00 check
in her bank in New York.
The New York Federal
Reserve deposits $50.00 into
The Granddaughter’s Bank.
The New York Federal Reserve
collects $50.00 from the
San Francisco Federal Reserve.
The San Francisco Federal Reserve
collects $50.00 from
Grandma’s Bank
Then
Bank
Grandma’s
Deducts the $50.00.
from her checking account.
Banking Applications
1. Lynchburg State Bank:
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starts the day with $18,993,560 in its
reserve account at the FRS in Richmond
during the day $1,256,780 in checks are
deposited and cleared by the bank.
also, $1,379,000 in checks are written and
cleared by customers of the bank
How much is in the bank reserves at the
end of the day?
Banking Applications
2. Ye Olde Bank of Campbell:
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starts the day with $35,664,440 in its
reserve account at the FRS in Richmond
during the day it returns $2,350,000 to the
Fed in currency that has accumulated in its
vaults.
What is the bank’s reserve account
balance after the cash is returned?
Banking Applications
3. Cattle Rustlers’ Hidden Regional Bank of
Butte, Montana:
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has $12,450,221 in its reserve account at the
FRS in __________________
during the day $644,970 in checks are deposited
and cleared by the bank.
also, $788,450 in checks are written and
cleared by local cattle rustlers
and, $350,000 in currency is delivered to the
bank by the FRS
What is the bank’s reserves balance at the
end of the day?
made savings and loans and credit unions
more like commercial banks
- Banks in one state could acquire banks in another state
- led to increased interstate banking
Financial Institutions could conduct non-banking activities without
Fed approval
(like securities and insurance activities)
Attempted to stem the possible collapse of banks and financial
holding companies during the 2007-2009 financial crisis
(controversial due to the size of the bailout and continues high
executive salaries)
Attempted to regulate financial activities after the 2007-2009
financial crisis
(considered by some too limited in scope and by others as overly
regulating the financial sector)
121 bank holding companies controlled
895 banks with 3260 branches
15 largest bank holding companies
controlled 70 banks with 19000 branches
5 largest banking organizations
held over $1.6 trillion in assets
83,000 branches and the largest has
over $1.8 trillion in assets and over
5,000 branches.
Mutual Fund Growth
• A pool of dollars from depositors that is used to
make financial investments in stocks, bonds, and
government securities.
1. Funds compete with banks for consumer savings and
making business loans
2. Provide a higher return than CDs and savings
accounts, but uninsured and returns fluctuate.
3. $1.1 billion in mutual funds in 1990,
$11.8 trillion in 2011
Savings and Loan Crisis
of the 80s and 90s
•
S & Ls were rigidly defined in the past, but new rules
changed operations and role
1. Depository Institution Regulation Act - 1980
a. allowed checkable deposits
b. lifted interest rate ceiling they could pay, causing
competition
c. many had fixed rate mortgages as income producers
(low rates)
d. they made riskier higher interest rate loans to
compensate
e. often with little or no collateral
2. Oil prices dropped and agriculture problems
added to problem
3. FSLIC increased insurance from $40,000 to
$100,000 backfired
- much less risk to banks, so riskier loans
were made
- government paid off
4. Looser regulations caused some fraud
5. Resolution Trust Corp
a. formed to oversee closing and sale of failed
S&Ls
b. closed or merged 747 failed thrift institutions
c. $480.9 billion total cost
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12 million Mercedes-Benzs
20 million Volvos
30 million Mazdas
100 million cars from Eastern Europe
(Skodas)
7,484,824,902.7 credit hours at CVCC
which is 2,494,941,634 courses
The Financial Crisis of 2007-2009
1. Shadow Banking
a. Institutions and markets that provide many
traditional banking functions, but are not regulated.
b. Investment banks, mortgage companies , and mutual
funds.
c. Huge growth recently, but failures are primarily
responsible for the financial crisis. Eg.Lehman Brothers
2. Subprime Mortgages
a. Price and supply of housing increased
rapidly.
b. mortgages provided to unqualified
borrowers at low initial rates.
c. rates increased above normal mortgage
rates after the initial period
d. borrowers felt they could easily “flip” the
property with rising property values.
3. Mortgage Bundling
a. In 2007, recession began
1) people lost jobs
2) interest rates increased.
3) property values fell.
b. mortgage companies mixed good and bad
loans together and sold them to the shadow
banking sector at attractive rates.
c. Many institutions left with “toxic” paper
Chapter 7 Questions
1. When something is generally acceptable as a means of payment for goods, services, and
resources, it is said to be a:
a.
commodity.
b. store of wealth.
c.
measure of value.
d. medium of exchange.
2. The value of money in the United states is determined by:
a.
The amount of gold backing the money.
b.
calculations by the Comptroller of the Currency.
c.
the goods, services, and resources that the money can purchase.
d.
none of the above.
3. The definition of the money supply that includes only coins and paper money in
circulation, nonbank-issued traveler’s checks, demand deposits primarily at commercial
banks, and other checkable deposits:
a.
M1.
b.
M2.
c.
M3.
d.
currency.
4. Which of the following statements is FALSE?
a.
National banks must belong to the Federal Reserve System.
b.
The Federal Deposit Insurance Corporation only insures banks that belong to
the Federal Reserve System .
c.
The dual banking system refers to the fact that both the federal and state
governments charter commercial banks.
d.
the Federal Reserve imposes some uniform regulations on all commercial banks,
whether or not they are members of the system.
5. The Federal Reserve System is headed by the:
a.
Board of Governors
b.
Open market Committee.
c.
US Secretary of the Treasury.
d.
presidents of the 12 Federal Reserve Banks.
6. The purchase and sale of government securities by the Federal Reserve is authorized
by the:
a.
Secretary of the Treasury
b.
Open Market Committee.
c.
New York Stock Exchange.
d.
US Securities and Exchange Commission.
7. Which of the following functions is NOT performed by the Federal Reserve Banks?:
a.
Keeping deposits for the general public
b.
Clearing checks for financial institutions.
c.
Supervising and examining member banks.
d.
Acting as fiscal agent for the federal government.
8. A reserve account is an account in the name of a:
a.
demand deposit holder at a commercial bank.
b.
Federal Reserve Bank that is held at the US Treasury.
c.
business that is held at a commercial bank to receive payments on bills.
d.
financial depository institution that is held at a Federal Reserve Bank and other
designated places
9.
Coins and paper money are put into circulation through the:
a.
US Treasury
b.
Board of Governors.
c.
Federal Reserve Banks.
d.
Open Market Committee.
10. The national debt is the total accumulated debt of:
a.
the federal government
b.
the federal government plus all state and local governments.
c.
all private borrowers in the United States.
d.
all government and private borrowers in the United States.