2. 1 SenateHouse 53Democrats 45Republicans 2 independent (Vice-president votes in case of a tie) 200 Democrats 232 Republicans 0 Independent 100 Senators 17 women 435 Members 78 women

3. Interactive journey through the Federal Reserve: Fed 101Fed 101 2

4. 3 Ben S. BernankeBen S. Bernanke, Board of Governors, Chairman William C. Dudley, New York, Vice Chairman James Bullard, St. Louis William C. Dudley James Bullard Elizabeth A. DukeElizabeth A. Duke, Board of Governors Charles L. EvansCharles L. Evans, Chicago Esther L. GeorgeEsther L. George, Kansas City Jerome H. PowellJerome H. Powell, Board of Governors Sarah Bloom RaskinSarah Bloom Raskin, Board of Governors Eric S. RosengrenEric S. Rosengren, Boston Jeremy C. SteinJeremy C. Stein, Board of Governors Daniel K. TarulloDaniel K. Tarullo, Board of Governors Janet L. YellenJanet L. Yellen, Board of Governors

5. 4 President reviews requests for funding and formulates his budget February–December 2009 Budget preparation and transmittal to Congress December 2009 - February 2010 Congress reviews President’s budget develops its own budget for the president to sign. March– September 2010 Fiscal Year beginsOctober first 2010 Agency program managers execute the budget. October 1 st 2010 – September 30, 2011 From February 2009 when the decision is made…. To October 2010 when the actual spending takes place!.

6.  Profits of each Federal Reserve Bank are distributed to the U.S. Treasury.  The Federal Reserve paid ~$78.4 billion of their estimated 2010 net income of $80.9 billion to the U.S. Treasury. 5

7. 6 The Government and Congress Fiscal Policy The Federal Reserve Bank Monetary Policy Changing taxes and spending Changing credit conditions in the economy.

8. The Federal Reserve System Created on December 23, 1913 by an Act of Congress.

9. District Banks are owned by member banks in the district.

10. Board of Governors (7) Federal Open Market Committee (FOMC) (5) 4 bank presidents and President of the New York Fed 12 Regional Bank Presidents (7+5)(7+5)

11. Members are appointed by the President and confirmed by the senate to 14 year terms.  Chairman and Vice-chairman are appointed by the president and confirmed by the senate to 4 year terms.  The president is directed by law to select “a fair representation of the financial, agricultural, industrial and commercial interests and geographical divisions of the country” 10 Board of Governors (7) 12 Regional Banks Federal Open Market Committee (FOMC) (7+5) Janet L. Yellen: Chairman

12.  (7)Members of the Board of Governors of the Federal Reserve System  Appointed by president confirmed by senate  (1)President of the Federal Reserve Bank of New York.  (4) On a rotating basis: presidents of the eleven other reserve banks.  Appointed by the board of directors of each bank.

13.  Since January 10, 2000 the FOMC issues a statement on its assessment of risks to stability in the foreseeable future.  Minutes are available after the next regularly scheduled meeting.  In the 1990s after pressure from Congress, the Fed began releasing transcripts of its interest-rate deliberations after a five year lag.transcripts 12

14. FISCAL POLICY MAKERS  Democratically elected  More than 500 representatives from different states and political inclinations.  Fiscal Policy decisions are debated and made open to the public. MONETARY POLICY MAKERS  Not Democratically elected but appointed for 14 years!  12 members all tied to financial institutions.  Monetary Policy decisions are not debated, nor are they open to the public. 13 Decisions are made very slowly Decisions can be made quickly to respond to the day to day events as they develop.

15.  Stabilize the business cycle: Promote economic growth, full employment, stable prices and sustainable international trade.  Supervise and regulate financial institutions.  The Constitution gives Congress the power "to coin money and regulate the value thereof."  Congress delegated that power to the FED when it created the central bank in 1913  Serve as the bank for the U.S. government 14

16. 15 Goldsmith Certificate = 5 gold pieces

17. 16 Goldsmith Certificate = 5 gold pieces Loan = 1 gold piece Loan = 5 gold pieces Loan = 5 gold piece Loan = 5 gold pieces

18. 17 First National Bank Your deposit $20,000 Your deposit $20,000 The bank makes loans and holds a portion as reserve in vault. $5,000 2,000 Reserve loans $8,000

19. Real Money Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit Your deposit = Money

20. Now you and other three individuals can write checks up to: 19 20,000 5,000 8,000 20,000 5,000 8,000 38,000 The bank holds only 2,000 If all these payments must be made at the same time, the bank does not have enough in reserves. Only 2,000 “support” 38,000 in spending!

21. Banks allow several individuals to write checks on the same amount of money… 20 Lending Create Money out of thin air…

22. 21

23. M1: Most liquid 1,785Billion M2:less liquid 8,752 Billion M2:less liquid 8,752 Billion Currency (904b) Travelers checks (5b) Demand deposits at banks(495b) Other demand deposits (386b) M2 8,752 Billion M2 8,752 Billion M1 1,785B M1 1,785B Nominal GDP ~ 14,000Billion Velocity of money: Number of times a dollar bill is used M1+ Savings deposits Money market deposit accounts Small time deposits Dollar value of what we bought Number of dollars in circulation Velocity = Nominal GDP/M 1 V = 14,000/1,785 =~ 8 Each dollar was used ~ 8 times during the year

24. The fed considers money only the most ‘liquid’ assets 23 Coins and Paper Money Checking Deposits

25. 24 + All Commercial Banks Demand Deposits at banks M s = Currency held outside banks + Demand Deposits The amount of money in circulation is the Money Supply

26. 25 Reserves If r = 10% Reserves 10% Loans = 90% of Deposits If r = 20% Reserves 20% 80% of Deposits A bank r Deposits Withdrawals Loans

27. 26 R = D x r D D L=D-R These loans become deposits at another bank (r)

28. Real Money Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit Your deposit D R = D*r L = D-R R = D*r L = D-R R = D*r

29. 28 Reserves 59 Deposits all banks 590 Loans 531 59 in reserves allow banks up to 531 in loans New loans are made. As loans are paid back, r = 10% R = D x r L=D-R R = 590 x 0.1

30. 8/18/2015 © 2002 Claudia Garcia-Szekely 29 Why is secrecy necessary in banking?

31. 30 Reserves =59B Deposits =590 B Loans 531B There are only $59B in banks’ reserves supporting $590B in deposits…if everyone tries to cash $590 at the same time there is NOT enough money for everyone… In a business based on confidence, when that confidence evaporates, so does the business.

32. In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout. Bernanke told them: "If we don't do this, we may not have an economy on Monday.“ The Emergency Economic Stabilization Act, which implemented the Troubled Asset Relief Program (TARP), was signed into law on October 3, 2008 31

33. By providing these loans to banks, the government expects banks to make loans to the public 32

34. Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit All Banks Deposits=800

35. Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit TARP 700B

36. Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit 700 700(0.9) 700(0.9)(0.9) 700(0.9)(0.0)(0.9) TARP 700B 700(0.9) 700(0.9)(0.9) 700(0.9)(0.0)(0.9)

37. 700 700(0.9) 700(0.9)(0.9) 700(0.9)(0.0)(0.9)

41. 40 1 r  D = x Original Injection 1 r  D = x New Reserves 1 r  D = x  R Money Multiplier Becomes reserves Multiple by which deposits increase for every $1 increase in reserves

42. 41 1 0.1  D = x 700  L =  D -  R Increase in Deposits = 7,000 Of these 7,000 in newly created deposits, only 700 is “real reserves” and the rest 6,300 are loans: money that does not exist.  L = 7,000- 700 = 6,300 How many loans were created? Fed injects $700, banks create $6,300 out of thin air…

43. Loans generate additional bank deposits causing an increase in the Money Supply: The increase in the money supply (  M s ) is: The increase in Deposits + increase in the amount of currency held by the public. 42  M s =  deposits +  currency outside banks M s = Currency + Deposits

44. 43 Deposits Bank OWNS Loans Reserves Bank OWES AssetsLiabilities Capital = Assets - Liabilities

45. All Banks Reserves R=80b All Banks Deposits D=800b d1= 200b d2= 180b d3=120b d4= 130b d5= 170b M s = Currency held outside banks + Demand Deposits (900b)(800b)(1,700b)

46. 900b7,800b8,700b) All Banks Deposits D=800b d1= 200b d2= 180b d3=120b d4= 130b d5= 170b +1,000 D= 800 + 7,000 New Money All Banks Reserves R=80 + 700 700 +2,000 M s = Currency held outside banks + Demand Deposits (900b)(800b)(1,700b)

47. 46 In our story, the original 700B deposit would set in motion a chain of loans and deposits at several banks… What if part of the loans are kept as “cash” and only part of it becomes another deposit at a bank? The deposit expansion will be smaller than (1/r )*  R The multiplier: 1/r is the same…but there will be less money for banks to multiply.

48.  Required Reserves (RR). The amount that must be held by law, the required reserve ratio times deposits: RR = r(D)  Actual Reserves (AR). The amount of reserves actually held by the bank. This could be higher or lower than RR.  Excess Reserves(ER). Any amount held above required reserves. 47

49. In our story, banks kept ONLY required amount of reserves (r%) What if one or more banks in the chain hold more reserves than required? The deposit expansion will be smaller than (1/r )*  R

50. 1. The amount of Excess Reserves held by banks. 2. Currency leak: loans leaking into currency held outside banks 49 The Money Multiplier (1/r) Gives the largest change in deposits that can occur if there is no currency leak no excess reserves.

51. All Banks Reserves R=60b All Banks Deposits D=600b d1= 100b d2= 80b d3=120b d4= 130b d5= 170b When checks are used to make a payment, the money simply changes “owner” Only new money is multiplied!

52. The reward for those who give up spending today in order to spend tomorrow The cost paid by those who want/need to spend today money they will make in the future The return the bank earns on a loan 51