Monetary Policy and Federal Reserve

What is Money?• Money is what people use to

buy things and services and what they take for selling their own things or services.

• Money is also called many other names, like currency or cash.

• Most of the time a state or government prints paper money and makes coins at a special place called a mint.

What gives money its value?

• YOU!!!• The faith you place on the dollar bill gives

money its value. • The money you have in your wallet, is not

backed up by anything. The faith you have that it is worth something is what gives money its value.

The BankWhat is a bank?According to Britannica.com,A bank isan institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged, respectively.

How the Bank makes profit?

There are three main ways banks makes money:1. by charging interest on

money that they lend. 2. by charging fees for

services they provide and 3. by trading financial

instruments in the financial markets (stocks).

Remember

• DEBT= MONEY• By charging you interest the banks make

money!!!• Interest is the percentage banks charge you

for taking a loan. You end up paying WAY more than what you borrowed.

• This is how money is also generated by banks! Through INTEREST!!!

Fractional Reserve

Fractional-reserve banking is the practice where a bank retains reserves in an amount equal to only a portion of the amount of tis customers deposits to satisfy potential demands for withdrawals.

Federal Reserve

The Federal Reserve System, or "the Fed," is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act.

What is Monetary Policy?

• Monetary policy is the process in which a country decides the flow of money and the economic decisions it must make to keep the economy healthy. In the U.S, the decision making mainly comes for the The FED.

Federal Reserve Bank• Central bank of the United States.• Decentralized formal structure.• A single bank located in Washington D.C. with

12 regional banks.

Federal Reserve – Technically Independent

• Long and staggered terms of governors.• Earns more from operations than it needs to cover

operating expenses - does not have to ask Congress for funds.

• Not directly subject to control by the executive and legislative branches of government.

• Federal Reserve banks are privately owned.

The Federal Open Market Committee• Chief policy-making body of the Federal Reserve

System.• Primary task: Draft monetary policy.• Voting Members– all seven governors – the president of the NY Fed– 4 presidents of the other eleven regional Banks. The right

to vote rotates among the 11 presidents - each voting for a period of one year. All presidents attend meetings.

• Meets about 8 times a year to formulate monetary policy.

• Decisions in the form of policy directives are passed on for execution to the NY Fed.

The Federal Reserve + Inflation

• Inflation means that the general level of prices is going up, which means more money will be needed to pay for goods. Example: Like a loaf of bread.

• Economist measure inflation regularly to know an economy’s state.

• The Federal Reserve controls this by deciding how much money they print.

Basically

• The Federal Reserve is basically the national bank that is controlled by a group of governors, and overseen by Congress. They control inflation, and the amount of credit banks are allowed to give out.

• They do monetary policy.• Supervise Banks.• Stabilize the Economy.• Oversee payments of U.S loans and money printing.

YouGet a Loan form the bank, but…

Since Banks function under Fractional

Reserves. The bank has to borrow money form

THE FED!

The FED then prints money from

the U.S MintRaising Inflation and causing things to get more expensive for citizens and the U.S

government.

The Government then sells bonds to the FED to

pay for services and other debt.

The FED buys bonds with interest and either keeps

them or sells them to foreign investors.

Then the IRS collects taxes from

…

To pay the DEBT from the THE FEDERAL

RESERVE

The way to make money for banks is to make more debt, charge more interest, and make more loans.Before 2006 de-regulation happened, meaning less rules for banks and less government checking on them.This created a free for all for banks and they lend money to people with bad credit and hid them calling Prime AAA loans.

The House Bubble in 2006

• Other banks around the world and in the United States saw this loans though they were good (because of the seal of approval :AAA) and bought them thinking they will get there returns back, plus they believed that house prices would keep going up.

• However, the AAA rating was not truthful and billions of dollars were lost when people did not pay back. Causing the collapse of huge companies such as IndyMAC and bailouts to Lehman Brothers

• And for many of us it resulted in Foreclosure…

ForeclosureForeclosure- Simply, foreclosure is the process by which a homeowner’s rights to a property are forfeited because of failure to pay the mortgage. If the owner cannot pay off the outstanding debt or sell it via short sale, the property then goes to a foreclosure auction. If the property does not sell at auction, it becomes the property of the lending institution.

Whose Fault?

• Banks?• People?• Government?• Capitalism?• Investors?