Chapter 14: Money, Banking & Financial Institutions

Credit unions accept deposits and then:

"Lend" the money to "members," who usually are a group of people who work for the same company.

Liquidity:

"Liquidity" is the ease with which money can be converted quickly world wide and be accepted and easily spent with little or no loss of purchasing power.

Federal Reserve Bank Functions:

*1. Manages/ Controls the Money Supply 2.Issues Currency: - - Issues "Federal Reserve Notes = Paper currency uses in U.S. monetary (money) system. 3. Sets Reserve Requirements For Banks: - - The Fractions of Checking Account Balance that Banks Must Maintain as Currency Reserves. 4. Holds Reserves For Banks. 5.Lends Money to Private Banks. 6. Provides Banks With Means for Clearing Checks: - - Provides banking system with means for collecting on checks 7.Bank Supervision: - - Supervises the operations of banks - - Periodic examinations to asses bank profitability 8. Lender of Last Resort of Financial Crisis: - - Makes routine short-term loans to banks and thrifts and charge them an interest rate called "DISCOUNT RATE"

QUICK REVIEW 14.2 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - >In the U.S., all money consists essentially of: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - >> These Debts efficiently preform the functions of money AS LONG AS: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - >>> The Value of Money is rooted not in specified quantities of precious metals but rather in: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - >>>>> GOVERNMENTS RESPONSIBILITY IN STABILIZING PURCHASING POWER OF MONEY CALLS FOR: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - > Debts of the Government, Commercial Banks, and Thrift Institutions. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - >> Their Value or Purchasing Power, is relatively stable - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - >>> Amounts of goods, services, and recourses that money WILL purchase. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - >>>>> 1. EFFECTIVE CONTROL OVER SUPPLY OF MONEY BY THE MONETARY AUTHORTIES 2. THE APPLICATION OF APPROPRIATE FISCAL POLICIES BY THE PRESIDENT AND CONGRESS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

How many Federal Reserve Banks (districts) Are There?

- 12 Federal Reserve Banks/Districts

Medium of Exchange:

- Anything used as money for buying/ selling goods/ services.

CONSIDER THIS: (Are Credit Cards Money?) *****

- Credit Cards are not money, they are mechanical payments that allow buyers to purchase an item NOW from a seller; which the buyer actually pays for LATER through the credit card company. - The Credit Card Company is the one that pays them in the meantime before the buyer pays the company back with interest. - In essence, the credit card user is taking a short-term loan from the company to make a purchase. - Credit card facilitate purchases for buyers and sellers and reduce the need for people to carry currency for purchases.

The Federal Reserve serves as the lender of LAST RESORT... **

- It does so by loaning more funds and purchasing hard-to-sell securities from banks and other institutions. - It also pays banks interest on the deposits they were required to keep at the Federal Reserve or that they held in their back vaults.

Federal Reserve Banking System (Central Bank):

- The "Mandate from Congress" - - - Fed Goals- - >Full Employment, Price Stability(avoid inflation and deflation) , and Economic Growth. - - Created in 1913 - -

** The Purchasing Power of the U.S. Dollar is: **

- The U.S. Dollar is Inversely related to the Price Level: Value of the Dollar. **********($V) = 1 / (P)********** - Value of Dollar = 1 / Price Level(in hundredths)

What "backs" the money supply or currency?

- The money supply gets its "backing" from the ability of the government to keep the purchasing power of money stable. - Nothing "backs it up"

The two major types of financial institutions offering checkable deposits are:

1. Commercial Banks 2. Thrift institutions

Money Definition - M1; consists of two components:

1. Currency 2. All checkable Deposits (Is the narrowest definition of the U.S. money supply)

Money has value only because:

1. It is acceptable for the exchange of desirable good and services 2. It is "LEGAL TENDER" 3. It is relatively scarce because its value depends on supply and demand conditions.

Money is whatever preforms what three basic functions of money?

1. Medium of Exchange 2. Unit of account 3. Store of Value

The M2 Definition of money includes 4 categories of Near-Monies:

1. Savings deposits, including money market deposit accounts (MMDA) 2. Small- denominated (less than $100,000) time deposits ("Time Deposits") 3. Money market mutual funds held by individuals(MMMF) 4. Regular Savings Accounts

"Federal Reserve Main Functions": **

1. They serve as the nation's Central Bank to implement the policies set by the Board of Governors 2. They are a Quasi-Public Bank, that blend private ownership of each back though the Board of Governors. 3. They are "Bankers' Banks" that preform banking services for the member banks in their regions.

How Many Members are on the FOMC? (Federal Open Market Committee)

12 Members - Which Include... 7 Members of board of governors + NYFED preside + 4 Presidents from districts on rotating basis

Federal Government is run by: Whom of which, exercises control over the supply of money and the banking system.

A "Board of Governors" - 7 Members appointed by president and then confirmed by congress. - Chairperson is usually one of the Board of Governors (Janet Yellen)

The 12 Districts of Federal Reserve Banks?- -

A1- Boston B2- New York C3- Philly D4- Cleveland E5- Richmond F6- Atlanta G7- Chicago H8- St. Louis I9- Minneapolis J10- KC Fed. - - KS, MO (part), NE, OK, CO, WY, NM (part) - - - Each bank has account at KC Fed. K11- K12-

TARP: (Troubled Asset Relief Program)

Allocated 700 billion to the U.S. Treasury to make emergency loans to critical financial and other U.S. firms.

MMDA = Money Market Deposit Accounts:

An Interest-Bearing account with short term securities

Money is a "stock" of some item or group of items. (unlike income, which is a "flow")

Any item or items that is widely accepted as a medium of exchange can serve as money. - Not JUST income

U.S. Monetary (money) authorities (THE FEDERAL RESERVE) - - - - - - - - - - >

Are Responsible for using monetary policy to maintain price level stability and the purchasing power of money.

MMMF = Money Market Mutual Funds:

Are Stocks and Bonds from different companies - Held by individuals

2. All checkable Deposits:

Are deposits in commercial banks("banks") and savings ("thrift") institutions, allowing people to transfer ownership of deposits to others by writing checks.

M2; Is a broader definition of money and includes not only the currency and checkable deposits in M1...

BUT ALSO "Near-Monies" that do not function directly or fully as a medium of exchange, but which can be easily converted to currency or checkable deposits...

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - The U.S. Financial Services Industry consists NOT ONLY OF BANKS AND THRIFTS...

BUT of: Insurance companies, mutual fund companies, pension funds, and securities firms as well!

Interest Payments on Reserves:

Bolstered the profitability of banks by paying interest on the reserves they hold in their vaults or in the Federal Reserve Banks.

Mortgage-Backed Securities:

Bonds backed by mortgage payments

Why is the Federal Government a "Quasi-Public Institution"? - - - - - >

Both Private Ownership and Public Control

THE MAIN CATEGORIES OF THE US FINANCIAL SERVICES INDUSTRY ARE: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

COMMERCIAL BANKS THRIFTS INSURANCE COMPANIES MUTUAL FUND COMPANIES PENSION FUNDS SECURITIES FIRMS INVESTMENT BANKS

Currency is not the only form of money...

Certain debts of Government and Financial Institutions also are used as money.

1. Currency:

Coins (token money) and paper money (Federal Reserve Notes) in the hands of public; supplied by the Government and Government Agencies.

Financial Services Industry:

Commercial Banks, Thrifts, Insurance Companies, Mutual Fund Companies, Pension Fund, Security Firms, Investment Banks.

Federal Reserve Banks, Commercial Banks, and Thrift (savings) Institutions are all:

Excluded from the calculation of M1 or in the other definitions of the money supply.

The amount of money available to the households and business is in much interest to the:

Federal Reserve (For Monetary Policy)

Federal Government also owns currency and checkable deposits:

Federal Reserve Banks

TALF: (Term Asset-backer Securities Loan Facility)

Helped households and business with their credit needs by providing funding support for asset-backed securities collateralized by student loans/auto loans.

Subprime Mortgage Loans:

High- Interest Rate Loans to home buyers with higher- than- average credit risk.

Near Monies:

Highly liquid financial assets that do not function directly or fully as a medium of exchange but can easily be converted into currency or checkable deposits.

The Purchasing Power of Money:

Is the amount of goods and services a unit of money will buy.

Legal Tender:

Legally acceptable for payments of debt

TSLF: (Term Securities Lending Facility)

Lent U.S. Securities to primary dealers for one-month terms to promote liquidity in the markets for those U.S. securities.

M2 Includes: **(M2 = M1 + A+B+C+D)

M1 ( currency and checkable deposits) + A: Regular Savings Accounts + B: Small Time Deposits + C: Money Market Deposit Accounts (MMDA) + D: Money Market Mutual Funds (MMMF)

Measuring the Money Supply:

M1 and M2

M2 Includes:

M1( currency and checkable deposits) PLUS (+) Near Monies ****M2 = M1 + A+B+C+D (Near Monies) ****

Unit of account:

Money is a "unit of account" - Society uses monetary units (dollars) as a yardstick for measuring the relative worth of a good or service.

Store of Value:

Money serves as a "store of value" that enables people to transfer purchasing power from the present to the future. - People do not always spend all of their incomes the day they receive it. To buy things later. Transfer purchasing power of money to future; bonds, stocks, and savings.

The checkable deposits of banks and thrifts are known variously as demand deposits...

Negotiable Order of Withdrawal (NOW) accounts Automatic Transfer Service (ATS) accounts, share draft accounts.

Securitization:

Process of slicing up and bundling groups of loans, mortgages, corporate bonds, and other financial debts into distinct new securities.

Asset- backed Commercial Paper Money Market Mutual Fund Liquidity Facility :

Provided Loans to the U.S. banks and thrifts to finance their purchases of commercial paper from money market mutual funds.

MMIFF: (Money Market Investor Funding Facility)

Provided funding support to private-sector initiative designed to ensure the liquidity of U.S. money market mutual funds.

PDCF: ( Primary Dealer Credit Facility)

Provided overnight loans to primary dealers who were willing to post loan-backed securities as collateral

CPFF: (Commercial Paper Funding Facility)

Purchased Commercial Paper to support the commercial paper market and therefore the short-term credit needs of businesses.

What is the Role of the Federal Open Market Committee (FOMC)? - - - - - - >

Responsible for acting on the Monetary Policy set by the Board of Governors. (Federal Open Market Committee)

** Rapid Inflation can erode the purchasing power and the public confidence in it.

Such situations limit the functions of money as a medium of exchange, measure of value, or stone of value.

Money is backed by the confidence in the confidence the public has...

The confidence they have that the purchasing power will remain stable.

* The Federal Reserve is an independent agency of government with control of: ("Most Important Function")

The money supply and influence over interest rates.

Token Money means:

The value of the metal in the coins is less than the face of the value of the coin.

Checkable Deposits:

These checks are generally accepted as a medium of exchange and are equivalent to the currency. Money, M1 = currency + checkable deposits

** Money is a debt or the promise of a commercial bank, a thrift institution or Federal Reserve Bank to pay, BUT:

These debts cannot be redeemed for anything tangible.

- -How Long do the Governors Serve?

They serve for 14 years!

"Savings and loan associations" and "mutual savings banks" accepts deposits of households and businesses and then use that money to:

They use these deposits to finance housing mortgages and to provide other loans.

This exclusion is designed to:

To enable a better assessment of the amount of money available to the "private sector" for potential spending.

What is Money?

Whatever preforms the functions of money IS money