Money & Banking (220:301:06) Spring 2010

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1 Money & Banking (220:301:06) Spring 2010 Dr Raymond Stone NJ Hall Office Hours: 3:15-4:00 Tuesdays and Thursdays Assistant (IMPORTANT--all inquiries regarding homework, etc, should be directed here) Kristin Lo Class meets Tuesdays/Thursdays 4:30pm to 5:50pm Room A7 Hardenbergh Hall CAC Prerequisites: Eco 102 & 103 (This is a lower level elective) Welcome to Money & Banking. The current Financial Crisis has resulted in significant innovation on the part of the Federal Reserve. The Fed has addressed the so-called "Zero-Bound" issue. That is, what can be done to support financial markets and the economy once the nominal policy rate has been reduced to zero. New tools have been added to the policy tool-kit. A new era of Financial Regulation is around the corner. The role of Banks versus other lending institutions is being reviewed. And the once largely unregulated derivative markets are topical in the halls of Congress. Concepts, such as the role of asset prices in monetary policy, the Too Big to Fail debate, etc are being re-thought. These topics and more will be discussed in class. We will study core topics addressed in the text, as well as, more current topics, which will be covered in textbooks not yet published. Final Exam To avoid any confusion it is policy to display the date and time of the final Exam on the front page of the syllabus. Date: May 12, 2010, Time 4:00pm

2 Grading Policy First Exam 40% Final Exam 50% Assignments 10% Make-Up Exams will only be given under extraordinary circumstances. Students should check with me before missing an exam to see whether their particular circumstances meet my very limited definition of extraordinary. Learning Outcomes Students who satisfactorily complete Money & Banking will understand the role of money and banks in the broader economy. Specifically, students should garner an understanding of the unique role of banks in the financial system. Students will also learn the relevance of the Federal Reserve and related central banking topics, including the causes, policy responses, and lessons associated with the current financial market crisis. Attendance Policy Students are expected to attend every class. While I understand that such is not always possible, students should be aware that I will not provide individual review sessions. We will be using "iclickers", so I will have a good idea of your attendance record. Moreover, students should understand that it is impossible to pass this course without regular attendance. Other The University has established rather severe penalties for cheating. For example, "Copying from or giving others assistance on an hourly or final examination..." is a Level Three violation. A Level Three violation carries with it "Suspension from the University for one or more terms." Textbooks Money & Banking (M&B), Robert Wright & Vincenzo Quadrini, Flatworld Knowledge. Online edition available for Free, Black & White edition for $29.95, and in full color edition for $59.95, plus several other options. The Federal Reserve System Purposes & Functions (FRSPF) Online: (Free) Hard-Copy Order Form: (Free) Optional--In Fed We Trust. David Wessel, Crown Publishing (2009) Available From Amazon: Great/dp/ /ref=sr_1_1?ie=UTF8&s=books&qid= &sr=1-1 - reader_

3 i>clicker: Required Available from Rutgers bookstore, or from Amazon.com System/dp/ /ref=pd_bbs_sr_1?ie=UTF8&s=books&qid= &sr=8-1 To register I>clicker go to: Homework Assignments There will be a number of homework assignments. These assignments are designed to get your "hands dirty" with economic and financial market data. You will be required to download data from Federal Reserve and other websites, manipulate the data in an Excel spreadsheet, compile graphs using these data, and reflect upon the underlying story captured in these graphs. Students should be aware that I am not looking for perfection; each assignment should take only about 1/2 hour. Your mission is an attempt at some basic level of economic research. My thinking is that you will understand the concepts better by actually playing with the data. Students should use the "Assignments" function on Sakai to turn in assignments. Full credit will be given to all "good-faith" attempts at completing assignments. Thus, make sure you turn in all assignments on time. This is an easy way of securing the full 10% contribution to your final grade. Class Notes I will use Power-Point presentations in class. I will make these available to you in advance (via Sakai). I recommend that you use printouts of these presentations to take class notes. Some students have found it useful to compile these presentations in a binder.

4 Week 1 (Jan 19/Jan 21) Macro-Review Lesson 1--What Is Money? Chapter 3--M&B Lesson 2--What Is a Bank? Chapter 2--M&B Assignment 1: Fun with "T-Accounts" Details to be announced Week 2 (Jan 26/Jan 28) Lesson 3--The Interbank Market for Reserves FedPoint:-- Federal Funds Assignment 2: Graph the following (1995 to present monthly, all on same graph) Federal Funds rate 1-month Eurodollar 1-month Commercial Paper (Nonfinancial) 1-month CD (secondary market) Bank Prime Loan 3-month Treasury Bill (secondary Market) These data can be found here: Lesson 4--The Banking Panic of 1907 and the Creation of the Federal Reserve Panic of 1907 Federal Reserve Bank of Boston Historical Beginnings. The Federal Reserve System (Chapter 3) Federal Reserve Bank of Boston Systemic Risk and the Federal Reserve, Bob McTeer's Blog, July 30, Week 3 (Feb 2/Feb 4) Lesson 5 & 6-- Money Supply and the Economy Who Was Milton Friedman (Paul Krugman, February 15, 2007) Monetary Policy And The Legacy of Milton Friedman (Anna J. Schwartz, Cato Journal, Vol 28, No2, Spring/Summer 2008)

5 Do Monetary Aggregates Help Forecast Inflation? Milton and Money Stock Control, William Poole (FRBSL July 30, 2007) Week 4 (Feb 9/Feb 11) Lesson 7 & 8 Understating Interest Rates Chapter 4--M&B FedPoint--Estimating Yields on Treasury Securities FedPoint--Understanding U.S. Government Securities Quotes FedPoint--Treasury Auctions Assignment 3: Bond Math Worksheet Week 5 (Feb 16/Feb 18) Lesson 7 & 8 Understating Interest Rates (Continued) Lesson 9 Interest Rate Determination Chapter 5--M&B Week 6 (Feb 23/Feb 25) Lesson 10 & 11 The Risk and Term Structure of Interest Rates Chapter 6--M&B The Yield Curve as a Leading Indicator, Arturo Estrella (FRBNY October 2005) - Main To Boldly Go Where We Have Gone Before, Adam Zaretsky, FRB of St Louis (2009) Assignment 4: Graph the following (1980 to present monthly) (1) Yield Curve Slope--10-yr constant maturity Treasury minus effective Fed Funds rate Compare Yield Curve Slope series with 12-month % chg in Industrial Production These data can be found on the St Louis Fed's FRED Database:

6 Week 7 (Mar 2/Mar 4) Lesson 12 & 13--The Money Supply Process Chapters 14 & 15 M&B-- Multiple Deposit Creation and the Money Supply Process Is the Fed Printing Too Much Money? Bob Mcteer (Jan 2, 2009) - comment-8713 Why Are Banks Holding So Many Excess Reserves, Todd Keister & James McAndrews, FRBNY Staff Report no Assignment 5: Graph the following: (Monthly 1978 to present) M1 & M2 Money Supply Multipliers (Money Supply/Monetary Base) Required Reserves, Excess Reserves, and the Monetary Base Total Reserves: Money Supply: Week 8 (Mar 9/Mar 11) First Exam Lesson 14--The Federal Reserve System FRSPF-- Chapter 1 Biography: Marriner Stoddard Eccles Week 9 (Mar 23/Mar 25) Lesson 15 & 16--The Federal Reserve System (continued) A Day in the Life of the FOMC Federal Reserve Communications, Ben Bernanke, November 14, Week 10 (Mar 30/Apr 1) Lesson 17-- Monetary Policy & the Economy/Tools of the Fed FRSPF-- Chapter 2 Chapter 16-- M&B FedPoint--Open Market Operations FedPoint-- Repurchase and Reverse Repurchase Transactions

7 FedPoint-- Discount Window Lesson 18--Implementation of Policy/A View From the Open Market Desk FRSPF-- Chapter 3 Week 11 (Apr 6/Apr 8) Lesson 19 --The Taylor Rule Chapter 17-- M&B Donald Kohn: John Taylor rules Monetary Policy and The Housing Bubble, Ben Bernanke (January 3, 2010 ) Taylor Says Bernanke Gets Rate Rule Right While Goldman Doesn t (Bloomberg, July 24, 2009) Assignment 6: Graph the following (Quarterly 1992 to present) Effective Funds Rate and Taylor Rule estimate of Funds Rate--Data to be provided Lesson 20 --The Transmission of Monetary Policy The Monetary Transmission Mechanism: Some Questions and Further Answers, Kenneth Kuttner and Patricia Mosser, FRBNY Economic Policy Review, May The Financial Accelerator and the Credit Channel, Ben Bernanke, At the The Credit Channel of Monetary Policy in the Twenty-first Century Conference, Federal Reserve Bank of Atlanta, Atlanta, Georgia, June 15, Week 12 (Apr 13/Apr 15) Lesson 21--Credit Crisis--How Did We Get Here? The Shadow Banking System and Hyman Minsky s Economic Journey, Paul McCulley, PIMCO's Global Central Bank Focus, May Shadow+Banking+and+Minsky+McCulley.htm

8 Lesson 22--Credit Crisis--Unconventional Fed Policies The Crisis and the Policy Response, Ben Bernanke, January 13, The Fed's Expanded Balance Sheet, Brian Sack, December 2, Monetary Policy in the Crisis: Past, Present and Future, Don Kohn, January 3, Monetary Policy Alternatives at the Zero Bound: An Empirical Assessement, Ben Bernanke, Vincent Reinhart, and Brian Sack, Federal Reserve Board--Read Non-technical summary Key Issues for Monetary Policy Makers, Raymond Stone, December 9, Interest on Reserves and Monetary Policy, Marvin Goodfriend, FRBNY Economic Policy Review A Primer On Quantitative Easing, Raymond Stone November 23, A Guide to the Fed's Alphabet Soup, Raymond Stone, January 26, Week 13 (Apr 20/Apr 22) Lesson 23-- Credit Crisis--Lessons Learned Too Big To Fail: The Hazards of Bank Bailouts, Excerpts from the 2004 book by Gary H. Stern and Ron J. Feldman, Federal Reserve Bank of Minneapolis, May Still More Lessons from the Crisis, Bill Dudley (FRBNY), December 7, Lesson 24--Credit Crisis--The Exit Strategy The Economic Outlook and the Fed's Balance Sheet: The Issue of "How" versus "When", Bill Dudley President of FRBNY, July 29, The Fed's Exit Strategy, WSJ Editorial by Ben Bernanke (July 21, 2009) Notes on the Fed's Exit Strategy, Raymond Stone (April 20, 2009)

9 Fed Lessons from , Raymond Stone (May 19, 2009) Week 14 (Apr 27/Apr 29) Lesson 25 --Topical Issues in Central Banking The Benefits of Price Stability, Ben Bernanke (2/24/06) Practical Problems and Obstacles to Inflation Targeting, Laurence Meyer (October 2003) Asset-Price "Bubbles" and Monetary Policy, Ben Bernanke (10/15/02) Lesson 26--Housing Finance/Securitization/Asset Backed Securities Mortgage-Backed Security Asset Backed Securities--Statistics Final Exam May 12, 4:00pm: Location To Be Announced