Date post: | 21-Mar-2017 |
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Economy & Finance |
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Money and Banking
Characteristics of MoneyMedium of ExchangeUnit of AccountStore of Value
Problem with Barter – Need Coincidence of Wants
Is it money?Criteria Credit Card Debit Card
Medium of exchange?
Unit of account?
Store of value?
YesNo
Substance used for money must be◦Plentiful (but not too much) in supply◦Uniform & hard to duplicate◦Durable◦Portable◦Divisible
History of moneyCowrie Shells
Metals
Paper Mone
y
Fiat Money
Fiat money: Money by lawNo intrinsic value as opposed to
commodity moneyTraded because people BELIEVE
in its worthOur dollar bill printed by the US
Treasury
The Pennyhttps://www.youtube.com/watch?v=_tyszHg9
6KI
What about checks?
Or Tide,http://www.foxnews.com/us/2012
/03/12/police-take-on-rising-wave-tide-detergent-theft/?intcmp=obnetwork
History of BanksSafekeeping
◦Temples◦Granaries
Source of Loans◦Rich families
Money-making venture◦Goldsmiths◦1600s: development of checques, paper
money and state banks
Banks’ RolePlace of Safe DepositPlace to borrow fundsMoney-making
◦Savers earn interest◦Banks Profit
Loan interest received (5%)
- Savings interest paid (1.5%)
Bank profits (3.5%)
Types of Banks
Full Reserves Fractional reserves
100% of deposit on hand
Fully redeemable for all at anytime
Bank as Guardian
No policy role
Portion on handPartially redeemable
for some – Bank Run risk
Bank as Business
Policy role in money creation
How loans create money
Reserve
@20% = $100
Deposits
$500
Loans
$400
Money Creation
Bankers 20% required reserve Buyers
+$1000 deposit• Keep $200 + loan $800
$800 deposit◦ Keep $160 + loan $640
$640 deposit◦ Keep $130 + loan $510
$510 depositEtc, etc, etc
$800 purchase
$640 purchase
$510 purchase
Etc, etc,etc
What makes a good loan?LenderWhy lend money?
BorrowerWhy borrow money?
- Make a profit- High interest rate
Urgent expensePotential income gainCheaper than renting or leasing
Value of the assetLender owns until borrower pays off
Value of the assetDoes it mean future greater income?
Ability to repay- Track record or Credit score- Proof of income- Other expenses/debts
Ability to repay- Consider future income- What else you may want to
spend money on. Avoid being “house poor
- Length of loan- (longer the loan lower the
interest rate but the more interest collected)
- Length of loan- (longer the loan the lower
the monthly payment but the more interest paid)
MicrolendingPBS Pakistan,
http://www.youtube.com/watch?v=qI9G7yGJ-ds
Grameen Bank (1976) ◦Group-based Credit ◦Trust-based◦Small deposits/small loans◦97% of members are women
2006 Nobel PrizeKIVA
US BankingLocal BanksNational Bank1792-1811 Bank of the United States1907 Financial Panic and JP Morgan1913 The Federal Reserve System
◦Decentralized-central bank 1933 FDIC, Glass-Steagall Act, Gold
Standard ended1999 Glass-Steagall overturned
Federal Reserve
System of 12 regional banksPolitically independentControls nation’s money supplyBoard of Governors & FOMCBanker’s BankFDIC up to $250,000
Monetary Policy
Open Market Operations by FOMC
Discount RateReserve Requirement
◦Quantitative easing from bank of England
Open Market Operations
Action taken daily
Buy or sell government debt◦ Increases or decreases Money Supply◦ Influences federal funds interest rate
Benefits and Problemshttp://www.marketplace.org/topics/
business/whiteboard/uncle-ben-goes-shopping
Discount RateAction taken less than daily usu
monthly
Changes the interest rate at which banks can borrow from the Fed
Benefits and Problems
Required Reserve Ratio
Rarely Changed
Adjusts the percentage of deposits required to be kept by banks
Benefits and Problems
How does the FOMC decide?Green book
◦Forecasts aggregate demand and prices
Blue book◦Presents policy options and impacts
of each
Beige book◦Data and anecdotal information
Countering the Business Cycle
Expansionary Actions-During recession
Contractionary Actions-When fearing inflation during boom
Monetary Policy
◦ Lower RR◦ Lower Discount Rate◦ Buy Bonds
◦ Find a way to get more money into the economy
Monetary Policy◦ Raise RR◦ Raise Discount Rate◦ Sell Bonds
◦ Find a way to pull money out of the economy
Expansionary – Money InBuy Bonds lowers interest rate on bonds encourages borrowing
Lower Discount Rate encourages banks to lend more
Lower Required Reserve Ratio increases money mulitplies
Expansionary Policy
PROS CONS
Works within private investment and consumption patterns
No change in US debt
Banks may not lendPeople and firms may
not borrow“Pushing on a string”
Lags but shorter than fiscal
(3-12 months vs 1-3 years)
Contractionary – Money OutSell Bonds raises interest rate on bonds discourages borrowing
Raise Discount Rate discourages banks from lending
Raise Required Reserve Ratio decreases money multiplier
Contractionary Policy
PROS CONS
Works within private investment and consumption patterns
No change in US debt
Can work quickly
Can over adjust“Fool in the shower”
Lags but shorter than fiscal
(3-12 months vs 1-3 years)