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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 ~
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
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?9th 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 GovernorsBen 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
FOMC
Sets monetary policy Adjusts money supply which impacts interest
rates and influences spending in the economy.
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
http://www.pbs.org/wgbh/pages/frontline/warning/cron/
1987 Reagan appoints Alan Greenspan; free market, de-regulation philosophy
Jan. 1993 Clinton economic team continues pathFeb. 1994 Major derivatives scandalMay 1998 One Regulator Is Closely Eyeing Derivatives
Sept. 1998 A Meltdown Begins at Long-Term Capital Management
Dec. 1998 No to Born; No to Regulation
1999 Banking Laws Are Changed; Repeal Glass-Steagall
Mar. 2000 Tech Bubble Bursts in Late '90s2001-2006 Housing prices can only go up
Bank Investment Bank
Main function
Accept deposits/give out loans
Sell securitiesStock, bonds, mutual funds
RiskAll accounts insured up to $250,000 (FDIC)
No guarantee, can lose all money invested
LiquidityFederal Reserve can make funds available in times of crisis
No access to funds, have to sell securities or secure lines of credit
ReturnLow rate of return Potential high rate of
return
RegulationSupervised 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. 2009 = 216.17
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.
1979-1984 economic turmoil Inflation + Stagnant GDP = Stagflation