Money, Banking, and the Fed How does money affect economic activity?

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Presentation transcript:

Money, Banking, and the Fed How does money affect economic activity?

U.S. Currency or “money”

Monday 1/3: NOTES 3 functions of money 6 characteristics of money 3 types of money Circular flow diagram spending/savings Fractional reserve banking VIDEO: Credit Crisis Visualized

What is “money”? Medium of exchange ~ Store of value ~ Unit of accounting or Standard of value ~

Characteristics of money DurabilityPortability DivisibilityUniformity StabilityScarcity

Three types of money Commodity money Money that also has value as a good (commodity). Representative money Money that can converted into gold or silver. Fiat money Money that has value because the government says so. Legal tender

Circular Flow of Mixed Economy

Households Businesses BANKS Fractional Reserve Banking Federal Reserve Circular Flow of Mixed Economy

Video: Eye of the Storm Structure of the Federal Reserve System Functions of the Federal Reserve Bank Explain the important role the “Fed” (Federal Reserve System) plays in our economy.

The Federal Reserve System

3. Number of districts? 12 districts 4. NR is part of which district? 9 th district 5. Selection process of Board of Governors. Appointed by President, confirmed by Senate for 14 year term. 6. Name current Chairman of Board of Governors Ben Bernanke

Functions of the Federal Reserve System 7. Bank for banks Provide money when needed Clear checks, replace currency, verify currency 8. Supervision & Regulation of banks Regulation; make laws for financial institutions Supervision; enforce laws for financial institutions 9. Conduct monetary policy Federal Reserve ability to change the amount of money in circulation (money supply or MS) MS changes  change in interest rates

In Plain English Watch Buck to get a virtual tour of the Federal Reserve system.

FOMC Sets monetary policy Adjusts money supply which impacts interest rates and influences spending in the economy.

Federal Reserve changes MS Md Q of M Interest Rate Ms i1i1

Credit Crisis Visualized 1. Define leverage. 2. Define CDO.(collaterized debt obligation) 3. Explain credit default swaps. 4. What role did the rating system play in the crisis? 5. Define subprime mortgage. 6. How did CDOs become riskier? 7. Define “underwater”.

Credit Crisis Visualized What happened? How did the Federal Reserve play a role in the crisis? At 1%, how long would it take to double investment? What lessons did you learn?

Frontline: the warning… Warning signs ignored, blame on both sides… What can be done to prevent another financial crisis? Alan Greenspan, Larry Summers, Robert Rubin

Reagan appoints Alan Greenspan; free market, de-regulation philosophy Jan Clinton economic team continues path Feb Major derivatives scandal May 1998 One Regulator Is Closely Eyeing Derivatives Sept A Meltdown Begins at Long-Term Capital Management Dec No to Born; No to Regulation 1999 Banking Laws Are Changed; Repeal Glass-Steagall Mar Tech Bubble Bursts in Late '90s Housing prices can only go up

Key players Bank Investment Bank Main function Accept deposits/give out loans Sell securities Stock, bonds, mutual funds Risk All accounts insured up to $250,000 (FDIC) No guarantee, can lose all money invested Liquidity Federal Reserve can make funds available in times of crisis No access to funds, have to sell securities or secure lines of credit Return Low rate of returnPotential high rate of return Regulation Supervised by Federal Reserve, restrictions on leverage Undefined supervision or restrictions on leverage Henry (Hank) Paulson Secretary of Treasury, oversees economy and advises President. Ben Bernanke Chairman of the Federal Reserve, controls money supply & regulates banks.

Inside the Meltdown Timeline of the crisis Key players in crisis Understanding of what happened What can be done to prevent another financial crisis

Inflation Prices rising throughout the economy. Purchasing power is the ability of money to buy goods & services. When inflation rises, purchasing power falls.

Consumer Price Index The CPI is a measurement of changes in price level over time. CPI in Nov =

Inflation impacts people differently…. Savers People on fixed income Businesses firms People who owe money People who lend money     Overall, inflation is bad because people pay more for the same stuff.

Video: Power of Money Historical look at the role the Federal Reserve took in stabilizing the economy economic turmoil Inflation + Stagnant GDP = Stagflation

The “Lost” Decade

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