Transcript Class 3 9/6 Money & Banking Power Point Presentaton

Money and Banking
Managing Financial Resources
Exploring Business
Chapter 13
Thursday 9/6/11
Economics
Macro Economics - Study of the economy as a whole
Bartering v. Money
13-3
Bartering
Money
Trade Stuff
For Stuff
Divisible
Portable
Durable
Hard to Counterfeit
Difficult To
Determine Value
Stuff Cannot
Always Be Saved
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Easy To
State Price
Stores Value
The Functions of Money
What Three Basic Functions Does Money Serve?
Functions of Money
Medium of Exchange
Measure of Value
Store of Value
Money Supply
What are the Two Primary Measures of the
Money Supply?
Money Supply
Measures: M- 1
M-2
How much M – 1 is there?
What is M-1 comprised of?
M–1 Measures
 M-1 was about $1.6 trillion dollars in 2008
Composition
 All currency in circulation
 All “checkable deposits”
 It’s the Narrowest measure of money supply
 Includes the most Liquid forms of money
 What does Liquid mean?
M–1
Liquid =
cash
checking accounts, etc.
When the press refers to the Money Supply
growing, it’s referring to M – 1
What’s the percentage breakdown of M-1
between currency and demand deposits?
M – 1 Currency Breakdown
25% of Currency is in Circulation
75% of Money is in Demand Deposits*
*Note: ONLY demand deposits are subject
To the Multiplier Effect.
Money Supply
What Does M–2 Measure?
Money Supply
M – 2 = Everyting in M-1
plus
near-cash items invested for the short
term like savings accounts, time
deposits
below $100,000, [non-negotiable
bank
CDs], and money market
mutual funds.
M – 2 is a much broader money definition than
M-1
U.S. Money Supply
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13-13
“Plastic Money”
1)
2)
3)
Not Spending Money
Buy-Now-Pay-Later = Loan [high
interest]
Money = Bill Paid
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13-14
Financial Institutions
What are Three Types of Depository
Institutions?
Depository Institutions
Commercial Banks – Lends funds to commercial
Customers and provide a variety of services.
Can you name some of the services a commercial
bank provides?
Services Offered By Banks








Checking/Savings Accounts
ATMs
Credit/Debit Cards
Loans
Financial Advice
Sells Financial Products
Insurance
Electronic Banking
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13-17
Depository Institutions
Savings Banks – called “thrifts” and S&Ls.
Set up to provide mortgages and
encourage savings
Depository Institutions
Credit Unions – provide member-only services
Depository Institutions
In which Depository Institution is most of our
money deposited?
Approximately what percent
of Total Deposits does that bank represent?
Where Our
Money Is Deposited
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13-21
80/20 Rule and Its Antithesis [20/80 Rule]
1) Basic Rule is a Truism in Commercial &
Industrial Sales:
80% of your sales comes from 20%
of your customer base.
Mr. “Ks” Career Observation:
2) Antithesis Rule: Truism in the Labor Force:
20% of your employees have the positive
attitude, motivation, drive, and example
to help a company succeed. The problem is
finding the 20%ers
Financial Institutions
What are Three Types of Non-Depository
Institutions?
Non-Depository Institutions
Finance Companies – Non-deposit financial
institution that makes loans from funds
acquired by selling securities or borrowing
from Commercial Banks
Non-Depository Institutions
Insurance Companies – non-deposit institution
that collects premiums from policyholders for
protedction against losses and invests these
funds
Non-Depository Institutions
Brokerage Firms – financial institutions that buy
and sell stocks [equities], bonds [debt
instruments], and other investments for their
clients.
Bank Regulation
Federal Depository Insurance Corporation
• 1933
• Insures Deposits ($100,000)
• Periodic Examinations
Office of Thrift Supervision
National Credit Union Administration
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13-27
Federal Reserve System
1.
2.
3.
4.
What kind of bank is it?
Where is it headquartered
Who is its current Chairman
How many regional Federal Reserve banks
are there in the US?
5. What are its principal duties?
Federal Reserve System
1.
2.
3.
4.
What kind of bank is it? Central bank
Where is it headquartered? Washington DC
Who is its current Chairman? Ben Bernanke
How many regional Federal Reserve banks
are there in the US? 12
5. What are its principal duties?
Conduct the nations monetary policy
Supervise & regulate banks
Maintain stability of the financial system
Provide financial services to depository
institutions
The Federal Reserve System
Federal Reserve
What are the Three Fundamental Goals of the
Federal Reserve?
Goals of the Federal Reserve
Price Stability
Sustainable Economic Growth
Full Employment
Federal Reserve
How does the FED marry its Goals with
its Monetary Policy?
1. Fed seeks to Stabilize Prices by regulating the
money supply and interest rates
2. Theoretically, Stable Prices promote Economic
Growth and Full Employment
Federal Reserve
What are the Three Tools the FED uses
To Conduct Monetary Policy?
The FED’s Monetary Policy
Set Reserve Requirements
For Whom?
The Fed’s Monetary Policy:
A Tool to Control Money Supply
1. Assume the RR for the Banks is 10%. The Bank
must keep 10% of deposits on reserve and can
lend the other 90%.
In theory, $1 deposited in a Bank with a 10% RR
results in the creation of another $10 in credit
through the “multiplier effect” [$1/0.1 = $10].
If the FED wanted to tighten credit, what action
might it take?
Reserve Requirements [RR] and the
Bank Multiplier Effect
The FED would raise the RR.
In an exaggerated example, if the FED raised the
RR from 10% to 15%, because of the
“multiplier effect”, $1 deposited in the bank
would now result in the creation of $6.67 in credit
[$1/0.15 = $6.67]
The Effect of the Money Multiplier
Assume
10% RR
Banks
Deposit
RR
1
$10,000
$1,000
$9,000
2
$9,000
$900
$8,100
3
$8,100
$810
$7,290
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Lending Amount
13-38
The Fed’s Monetary Policy:
A Second Tool to Control Money Supply
The Discount Rate – the interest rate that the FED
charges member banks to borrow reserves.
Fed’s Impact on Interest Rates
Fed Funds Rate – rate of interst member banks charge each
other for overnight loans. Lowest rate currently fluctuating
between 0.00 % and 0.25%
Discount Rate – rate at which member banks can borrow
from Fed. Generally 1% higher than FFR. Currently at 0.75%
Prime Rate – Rate at which banks make unsecured loans to
their best commercial customers. It is the most widely used
benchmarks in setting home equity lines of credit and credit
card rates. Currently 3.25%
Key Interest Rates
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13-41
The Fed’s Monetary Policy:
A Third Tool to Control Money Supply
Open Market Operations – The FED adjusts credit
availability through the sale and purchase of
US government bonds in the “open market”
[primarily commercial banks].
When a member bank uses cash to buy US
Government bonds:
1)What happens to their reserve balances?
2)What happens to the economy as a Whole?
3)During what economic cycle might you employ
this strategy?
Federal Reserve
When a member bank uses cash to buy US
Government bonds, the FED takes potential
reserve money out of circulation. This means
less money to lend and less of a Multiplier
Effect.
This action tends to slow the economy down
and would be used during inflationary cycles
Federal Reserve
Mr. “Ks” Observation:
Fact: There is nothing backing the US currency
other than the “faith” and confidence of
the people in the Store of Value.
The FED can print money at its discretion
[e.g, its Quantitative Easing program –
QE1 and QE2], which is, in effect, a hidden
inflation. I’m not against central banking –
I’m against our currency not backed by
some tangible value [gold, platinum, etc.]