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THE FEDERAL RESERVEThe Federal Reserve (the Fed) was established
in 1913 as America’s central Bank.
It sets the nation’s monetary policy.
The actions of the fed affect everyone daily.
THE FEDERAL RESERVE ACT
Mandates of the Act:Stable prices
Moderate long term interest ratesMaximum employment
FED ACT-CON’T-DECENTRALIZED STRUCTURE
7 member Board of Governor’s in Washington, DC who are appointed by the President and confirmed by the Senate.
12 regional Reserve banks with a separate board of directors and a President
25 branch banks Financial Independence Congressional oversignt
THE FEDERAL RESERVE DISTRICTS
The country is divided into 12 districts. Washington, DC is the headquarters. Each district has a main bank located in a
major city. These cities were selected so they are no more than a 1 days train ride apart.
Houston is in the 11th district. Dallas is the main Bank San Antonio and El Paso have branch banks for
our region.
ORGANIZATION OF THE FED.
The Fed is a corporation member banks own stock.
The Fed pays member banks a 6% annual dividend on Fed stocks.
Any profit by the Fed is returned to the US treasury. In 2009, this amount was $47.4 billion.
FUNCTIONS OF THE FED
Approve bank mergers
Watch bank actions and lending
Currency supplier
Bank for U.S. Government accounts
Clear checks
Maintain Stability of the Financial System
Provide Financial Services
FUNCTIONS OF THE FED
Regulate foreign banks in the United States
Regulate U.S. banks overseas
Regulate military banks
Sets reserve requirement.
Buy/sell bonds to raise/lower interest rates.
Supervise and regulate banking industry
Conduct monetary policy
THE FED IS A BANKER’S BANK
Check processing Electronic funds
transfer (EFT) Paid over $30 billion
in checks in 2006
Puts money in circulation
Distroy’s old money
By 2010 the Fed will have only 4 check clearinghouses-Atlanta, Dallas, Philadelphia and Cleveland
Payment SystemIssuer and distributor
of currency
FISCAL AGENT FOR THE US TREASURY
Maintain the treasury’s bank account.
Handle weekly actions of treasury securities.
Issue and redeem savings bonds
The bank for the US government
REGULATOR AND SUPERVISOR Examine banks to
foster a sound banking system
Ensure compliance with all consumer protection laws
Evaluate Community Investment performance
MONETARY POLICYMAKER Major function of all
central banks Monetary policy
actions influence availability and cost of money and credit
Focus on price stability
Promote savings and investment
Keep inflation and unemployment in check.
EXPANDED ROLE OF THE FED. The fed will have
expanded oversight of the banking and credit industry, including credit card interest rates.
DIFFERENCE BETWEEN FED AND TREASURY
The Federal Reserve System is the nations bank. Its primary purpose is to regulate the flow of money and credit in the country.
Janet Yellen
The Treasury is the department in government which is in charge of revenue, taxation and public finances. They are the financial operations for the government.
Jack Lew
SECTION 2: TOOLS OF MONETARY POLICY
The Federal Open Market Committee (FOMC) meets 8 times a year in Washington, DC and announces any monetary action taken.
Actions of the FOMC
affect the country.
SECTION 2: TOOLS OF MONETARY POLICY
The Federal Open Market Committee (FOMC) meets 8 times a year in Washington, DC and announces any monetary action taken.
Actions of the FOMC
affect the country.
RESPONSIBILITIES OF THE FOMC
Assess National and regional economic and financial conditions using regional perspectives.
Determine credit and interest rates policies.
Target the Federal Funds rate. Direct open market operations
conducted by the New York Fed to achieve goals of price stability and sustainable economic growth.
SIX TOOLS OF MONETARY POLICY
Buy/sell government securities. This increases the money supply
Interest rate the Fed charges to member banks for loans.
Open Market Operations Discount rate
SIX TOOLS OF MONETARY POLICY
Increase or decrease required reserves held by banks.
Currently 10%
How much money is needed to purchase stocks.
Reserve Requirement Margin Requirements
SIX TOOLS OF MONETARY POLICY
Chairman of the Fed gives his opinion on the economy.
Selective, specific goals usually in wartime.
During WWII, no cars were produced.
Moral Suasion Selective Credit Controls
PART 3-MONETARY POLICY, BANKING AND THE
ECONOMY
Short run impact-of an increase or decrease in the money supply affects the price of borrowing.
The prime rate is the interest rate at commercial banks charge their best customers.
MONETARY POLICY, BANKING AND THE ECONOMY
Long run impact- of a change in the money supply affects the general level of prices or inflation.
The Quantity Theory of Money—example: the Continental Congress issued $250 million in currency causing 123% inflation.
EASY MONEY POLICY A group of actions to
increase the money supply, fight a “recession”—easy money.
Buy government securities
Lower discount rate Lower reserve
requirement
Interest rates fallSpending/borrowing
increasesMoney supply increases
TIGHT MONEY POLICY A group of actions
by the Fed to cut the money supply to fight inflation—”tight” money.
Sell government securities.
Raise discount rate Raise reserve
requirement
Interest rates riseSpending/borrowing
fallsMoney supply falls
THE FED AND THE PRESIDENT Interest rates are
political because Presidential elections are political.
The actions of the fed are political because the chair of the Fed is appointed by the President.
FEDERAL GOVERNMENT EXPENDITURES-OR THE BUDGET
The federal budget year is Oct. 1 to Sept 30 of each year.
The budget is prepared by the by the Office of Management and Budget.
The budget must be sent to Congress no later than Feb. of each year for Congressional approval.
TWO KINDS OF GOVERNMENT SPENDING
Spending authorized by law that continues without the need for government approval.
Examples: social security, medicare, debt payments
Programs that must receive annual authorization.
Examples: military and welfare
Mandatory SpendingDiscretionary Spending
ENTITLEMENT PROGRAMS
Entitlement is a guarantee of access to benefits because of rights or by agreement through law.
Social Security, Medicaid, Medicare are large entitlement programs that take.
These account for over $1 trillion of the federal budget.
IMPACT OF GOVERNMENT SPENDING
Easy? Recessions-push government spending
toward a deficit. Why?
Expansionary periods-push government spending toward a surplus Why?
KEYNES-GENERAL THEORY ON EMPLOYMENT, INTEREST AND MONEY
The level of employment needed is determined by the spending of Money.
Which means-persons working cost the government less money and government collects more money.
DEFICITS, SURPLUSES AND NATIONAL DEBT
Deficit spending-is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus.
Federal Debt or surplus-The annual government deficit or surplus refers to the cash difference between government receipts and spending.
Debt ceiling-limit on government spendingcurrently-$14.294 trillion by H.J.Res. 45 was signed into law on February 12, 2010
NATIONAL DEBT
National Debt
What happens when the USA reaches the debt ceiling? No more money can be borrowed to finance
government spending.
There is no constitutional requirement that the USA have an anually balanced budget
STATE OF TEXAS AND DEBT
The State of Texas is required by the Constitution to have an annually balanced budget. This means Texas cannot have a budget deficit.
What happens if they take in less money than they need to spend?
IMPACT OF THE NATIONAL DEBT Taxes and tax burden-increase taxes, less
money for consumers to spend.
Larger the debt, the larger the interest payments; and therefore the more taxes to pay them.
Increased taxes reduce incentive to work, save and invest.
PA
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Click icon to add picture What is money?
Money is any substance used to pay for goods or services.
Most people say they do not have enough money.
History of money
BARTER Barter is the trading of goods without money.
Yes, barter still happens today.
Pro’s of barter-no government, no taxes. Get what you need without money, if you have something to trade.
Con’s of barter-products/services may not divide evenly. Comparable values may not exist.
FUNCTIONS OF MONEYMedium of exchange-people must accept as
payment for goods.
Measure of value-measure of what a good is worth in dollars and cents.
Store of value-place holder of an amount.
CHARACTERISTICS OF MONEYPortable-easy to carry and exchangeDurable-lasts over time, withstands
wear and tear.Divisible-divide into smaller units.*Stable in value-retains value over time.
But, can lose value due to inflation.Scarce-limited supply.Accepted-Government or an agency
must approve for use. You can’t just create your own money.
MONEY IN EARLY SOCIETIES Commodity money-money with an
alternative use. Wampum-sea shells used for money. Fiat money-money by government decree. Legal tender-currency that must be
accepted. Representative money-an be exchanged for
gold or silver. Specie-gold/silver coins from Europe.
IN THE COLONIESCommodity and fiat
money was used including:
tobaccoGunpowderCoinsColonial paper money
MONETARY UNIT
a standard unit of currency. Unique to each country
USA-dollar Mexico-Peso Japan-Yen France-Euro
GOLD STANDARD
Holds back economic growth.
Increased demand for gold lowers reserves.
Gold price must remain constant.
Advantages Disadvantages Trade money for
gold Trust in money Keeps government
from printing too much money.
GOLD STANDARD During the Depression the
government gave up on the gold standard.
People were encouraged to turn in their gold.
Many did not due to their loss of faith in paper money.
Having gold could result in fines, but people hid their gold.
GOLD STANDARD After leaving the gold
standard the US changed to inconvertible fiat money.
People cannot demand gold or silver in return for their money.
The government controls the money supply and issues a single currency.
BANKS An organization, usually a corporation,
chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.
SAVINGS AND LOANS Savings and Loan (S&L)- A federally or state
chartered financial institution that takes deposits from individuals, funds mortgages, and pays dividends.
CREDIT UNIONS A non-profit financial institution that is owned
and operated entirely by its members.
When a person deposits money in a credit union, he/she becomes a member of the union because the deposit is considered partial ownership in the credit union.
BANKS AND BANKING SERVICES
Since deregulation-banks do not charge the same fees for all services they provide.
Shop for the bank that is right for you.
TYPES OF DEPOSITS
Demand deposits-checking accounts Time deposits-savings accounts
Money Market Accounts-a checking account that is invested in the stock market and can earn interest and is charged a fee based on market fluctuations.
NOW account- Negotiable Order of Withdraw)--An interest-bearing checking account at a bank or savings and loan.
OTHER BANKING SERVICES Overdraft protection-A checking
account/debit card feature in which a person has a line of credit to write checks for more than the actual account balance.
BANKING SERVICES Electronic Funds Transfer
(EFT)- Any transfer of funds that is initiated by electronic means, such as an electronic terminal, telephone, computer, ATM or magnetic tape.
Automated Teller Machines (ATM)-a machine at a bank branch or other location which enables a customer to perform basic banking activities (checking one's balance, withdrawing or transferring funds) even when the bank is closed.
BANKING AND YOU
Debit card- A card which allows customers to access their funds immediately, electronically. Unlike a credit card, a debit card does not have any float.
Certificates of Deposit (CD’s)-CDs are low risk, low return investments, and are also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years
BANKING AND YOU Safe Deposit Box-a lock box in a bank that is
used to store valuable items and documents.
Electronic Banking-banking done on line. This can be used to pay bills, transfer funds, etc.
Service Charge-Bank fee charged for specific services or as a penalty for not meeting certain criteria
TRUTH IN LENDING LAWS Legislation passed in
some countries, such as the Home Mortgage Disclosure Act of 1968 and Consumer Credit Protection Act of 1969 in the US.
Under these laws a lender must, clearly and conspicuously, reveal all the key details of a home mortgage or consumer loan before the borrower signs the loan agreement.
Borrowers who mortgage their dwelling house as a collateral are generally allowed a cooling off period (usually three days) to rethink the implications of the loan agreement and to cancel it if they so decide.
DENOMINATIONS OF MONEY Currency
$1, $2, $5, $10, $20, $50 and $100’s
Coins
$.01, $.05, $.10, $.25. $.50, $1.00
OUR MONEY:
BY THE NUMBERS Facts about on how much each denomination represents in the 9.12 billion currency notes the Bureau of Engraving and Printing will produce in the current budget year and the average life for each note:
$1 note: 45.5% of total note production; 21 months.
$5 note: 15.4%; 16 months. $10 note: 0.9%; 18 months. $20 note: 21.6%; 24 months. $50 note: 4.7%; 55 months. $100 note: 11.9%; 89 months.
COMPONENTS OF THE MONEY SUPPLY
M1 money-currency, coins and travelers checks. Money is more liquid.
M2 money-M1+checking and savings accounts +money market accounts and CD’s. Money is less liquid.
FT. KNOX, KENTUCKY AND GOLD Not all currency is
backed by gold. There are 147.3
million ounces of gold.
The gold is held as an asset of the US Government at a book value of $42.22 per ounce.
A gold bar is 400 ounces or 27.5 pounds
COUNTERFEIT MONEY
Yes, printing your own money is a crime.
The Secret Service investigates counterfeit money.
SO YOU WANT TO OWN A BANK?
How banks operate:Banks make money by accepting deposits and
making loansLiabilities are the debt/obligations of the bank.Assets are the property/posessions of the bank.A balance sheet is a statement showing
assets/liabilities of a bank.The net worth is the excess of assets over
liabilities.
STARTING A BANK Organize, obtain a charter. Buy into the Fed (like buying insurance) Make loans
Excess reserves are deposits-reserves
Reaching maturity deposits=loans=economic growth
Loans=monetary growth---loans increase money for loans.
BANKS IN ACTION Equity-investment against bankruptcy Bank liabilities-obligations to others
Required reserves are the amount of money that a bank must set aside and not loan. The size of the reserve is set by the Fed. This is a fractional reserve system.
BANKS IN ACTION Most of the deposits are returned to the
community in the form of loans.
Banks invest in bonds: they are a safe investment and are easily converted to cash.
BANK BALANCE SHEETS
Assets LiabilitiesBonds Demand Deposits
Reserve requirement Time Deposits
Excess Reserves Capital Stock
Loans CD’s
Building/Equipment
Total: Total:
Assets and liabilities must always equalNotes page 16
BANK PROFIT For a bank to make a profit it must have a
spread between what is paid out in interest and what it takes in on interest on loans over 3%
BANKING A state bank is generally a financial
institution that is chartered by a state. It differs from a reserve bank in that it does not necessarily control monetary policy (indeed, the state in question may have no legal capacity to create monetary policy), but instead usually offers only retail and commercial services.
They oppose mandatory membership in the Fed.
BRANCH AND ELECTRONIC BANKING Until the 1990’s branch banking was illegal
(having more that one location of the same bank.)
Banks are facing increasing competition.
Electronic banks are putting pressure on brick and mortar banks due to lower costs.
DEPOSITORY INSTITUTION DEREGULATION AND MONETARY CONTROL ACT]
Passed in 1980, gave the Federal Reserve greater control over non-member
banks.
It forced all banks to abide by the Fed's rules.
It allowed banks to merge.
It removed the power of the Federal Reserve Board of Governors to set the
interest rates of savings accounts.
It raised the deposit insurance of US banks and credit unions from $40,000 to
$100,000.
It allowed credit unions and savings and loans to offer checkable deposits.
Allowed institutions to charge any interest rates they chose.
FDIC Since the start of FDIC insurance on January
1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.
The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.