Bài giảng MicroEconomics - Chapter 31 Money, Banking, and Financial Institutions

Money, Banking, and Financial InstitutionsMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Functions of Money Medium of exchangeUsed to buy/sell goodsUnit of accountGoods valued in dollarsStore of valueHold some wealth in money formMoney is liquidLO131-2Money Definition LO1M1M2CurrencyCheckable depositsInstitutions offering checkable depositsCommercial banksSavings and loan associationsMutual savings banksCredit unionsM1 plus near-moniesSavings deposits including money market deposit accounts (MMDA)Small-denominated time depositsMoney market mutual funds (MMMF)31-3What “Backs” the Money Supply?Guaranteed by government’s ability to keep value stableMoney as debtWhy is money valuable?AcceptabilityLegal tenderRelative scarcityLO231-4What “Backs” the Money Supply?Prices affect purchasing power of moneyHyperinflation renders money unacceptableStabilizing money’s purchasing powerIntelligent management of the money supply – monetary policyAppropriate fiscal policyLO231-5Federal Reserve - Banking SystemHistorical backgroundBoard of Governors12 Federal Reserve Banks Serve as the central bankQuasi-public banksBanker’s bankLO331-6Federal Reserve – Banking SystemCommercial BanksThrift Institutions(Savings and Loan Associations,Mutual Savings Banks, Credit Unions)The Public(Households andBusinesses)12 Federal Reserve BanksBoard of GovernorsFederal Open Market CommitteeLO331-7Federal Reserve – Banking SystemLO3The 12 Federal Reserve Banks31-8Federal Reserve – Banking SystemFederal Open Market CommitteeAids Board of Governors in setting monetary policyConducts open market operationsCommercial banks and thrifts6,800 commercial banks8,700 thriftsLO331-9Federal Reserve FunctionsIssue currencySet reserve requirementsLend money to banks Collect checksAct as a fiscal agent for U.S. governmentSupervise banksControl the money supplyLO431-10Federal Reserve IndependenceEstablished by Congress as an independent agencyProtects the Fed from political pressuresEnables the Fed to take actions to increase interest rates in order to stem inflation as neededLO431-11Financial InstitutionsWorld’s 12 Largest Financial Institutions, 2009Royal Bank of Scotland (UK)Barclays (UK)Deutsche Bank (Germany)BNP Paribas (France)HSBC Holdings (UK)JPMorgan Chase (US)Credit Agricole (France)Citigroup (US)Mitsubishi UFJ (Japan)UBS (Switzerland)ING Group (Netherlands)Bank of America (US)0 1.5 2.5 3.5 Source: Forbes Global 2000, (Trillions of U.S. Dollars)LO431-12The Financial Crisis of 2007 and 2008Mortgage Default CrisisMany causesGovernment programs that encouraged home ownershipDeclining real estate valuesBad incentives provided by mortgage-backed bondsLO531-13The Financial Crisis of 2007 and 2008Securitization: the process of slicing up and bundling groups of loans into new securitiesAs loans defaulted, the system collapsed“Underwater” homeowners abandoned homes and mortgagesLO531-14The Financial Crisis of 2007 and 2008Failures and near-failures of financial firmsCountrywide: second largest lenderWashington Mutual: largest lenderWachoviaOther firms came closeLO531-15The Financial Crisis of 2007 and 2008Troubled Asset Relief Program (TARP)Allocated $700 billion to make emergency loansSaved several institutions from failureLO631-16The Financial Crisis of 2007 and 2008The Fed’s lender-of-last-resort activitiesPrimary Dealer Credit FacilityTerm Securities Lending FacilityAsset-Backed Commercial Paper Money Market Mutual Fund Liquidity FacilityCommercial Paper Funding FacilityLO631-17The Financial Crisis of 2007 and 2008Money Market Investor Funding FacilityTerm Asset-Backed Securities Loan FacilityInterest Payments on ReservesLO631-18