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 M1 Currency Checkable deposits Institutions offering checkable deposits Commercial banks Savings and loan associations Mutual savings banks Credit unions M2 M1 plus near-monies-?? Savings deposits including money market deposit accounts (MMDA) Small-denominated time deposits Money market mutual funds (MMMF) LO1 31-6
What Backs the Money Supply? LO2 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?? 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 Board of Governors Federal Open Market Committee 12 Federal Reserve Banks Commercial Banks Thrift Institutions (Savings and Loan Associations, Mutual Savings Banks, Credit Unions) The Public (Households and Businesses) LO3 31-10
Federal Reserve Banking System The 12 Federal Reserve Banks LO3 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) Assets (Trillions of U.S. Dollars) 0 1.5 2.5 3.5 LO4 Source: Forbes Global 2000, http://www.forbes.com 31-15
The Financial Crisis of 2007 and 2008 LO5 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 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