Presentation is loading. Please wait.

Presentation is loading. Please wait.

Interactive journey through the Federal Reserve: Fed 101Fed 101 1.

Similar presentations


Presentation on theme: "Interactive journey through the Federal Reserve: Fed 101Fed 101 1."— Presentation transcript:

1

2 Interactive journey through the Federal Reserve: Fed 101Fed 101 1

3 2 The Government and Congress Fiscal Policy The Federal Reserve Bank Monetary Policy Changing taxes and spending Changing credit conditions in the economy.

4 3 President reviews requests for funding and formulates his budget February–December 2009 Budget preparation and transmittal to Congress December February 2010 Congress reviews Presidents budget develops its own budget for the president to sign. March– September 2010 Fiscal Year beginsOctober first 2010 Agency program managers execute the budget. October 1 st 2010 – September 30, 2011 From February 2009 when the decision is made…. To October 2010 when the actual spending takes place!.

5 Fiscal Policy can not be used for the day to day fine tuning of economic policy because the budget process is too long. 6/12/2014 4

6 5 SenateHouse 53Democrats 45Republicans 2 independent (Vice-president votes in case of a tie) 200 Democrats 232 Republicans 0 Independent 100 Senators 17 women 435 Members 78 women

7 THE GOOD NEWS IS… Democratically elected More than 500 representatives from different states and political inclinations. Fiscal Policy decisions are debated and made open to the public. THE BAD NEWS IS… Democratically elected More than 500 representatives from different states and political inclinations. Fiscal Policy decisions are debated and made open to the public. 6

8 Rule by the Few: The Federal Reserve System Created on December 23, 1913 by an Act of Congress.

9 Fed District Banks are corporations whose stock holders are member banks in the district.

10 Board of Governors Board of Governors (7) Board of Governors Board of Governors (7) Federal Open Market Committee (FOMC) (5) 4 bank presidents and President of the New York Fed 12 Regional Bank Presidents Bank Presidents 12 Regional Bank Presidents Bank Presidents (7+5)(7+5)

11 Members are appointed by the President and confirmed by the senate to 14 year terms. Chairman and Vice-chairman are appointed by the president and confirmed by the senate to 4 year terms. The president is directed by law to select a fair representation of the financial, agricultural, industrial and commercial interests and geographical divisions of the country 10 Board of Governors (7) 12 Regional Banks Federal Open Market Committee (FOMC) (7+5) Ben S. Bernanke: Chairman

12 (7)Members of the Board of Governors of the Federal Reserve System Appointed by president confirmed by senate (1)President of the Federal Reserve Bank of New York. (4) On a rotating basis: presidents of the eleven other reserve banks. Appointed by the board of directors of each bank.

13 FISCAL POLICY MAKERS Democratically elected More than 500 representatives from different states and political inclinations. Fiscal Policy decisions are debated and made open to the public. MONETARY POLICY MAKERS Not Democratically elected but appointed for 14 years! 12 members all tied to financial institutions. Monetary Policy decisions are not debated, nor are they open to the public. 12 Decisions are made very slowly Decisions can be made quickly to respond to the day to day events as they develop.

14 Stabilize the business cycle: Promote economic growth, full employment, stable prices and sustainable international trade. Supervise and regulate financial institutions. The Constitution gives Congress the power "to coin money and regulate the value thereof." Congress delegated that power to the when it created the central bank in 1913 Serve as the bank for the U.S. government 13

15 14 Ben S. BernankeBen S. Bernanke, Board of Governors, Chairman William C. Dudley, New York, Vice Chairman James Bullard, St. Louis William C. Dudley James Bullard Elizabeth A. DukeElizabeth A. Duke, Board of Governors Charles L. EvansCharles L. Evans, Chicago Esther L. GeorgeEsther L. George, Kansas City Jerome H. PowellJerome H. Powell, Board of Governors Sarah Bloom RaskinSarah Bloom Raskin, Board of Governors Eric S. RosengrenEric S. Rosengren, Boston Jeremy C. SteinJeremy C. Stein, Board of Governors Daniel K. TarulloDaniel K. Tarullo, Board of Governors Janet L. YellenJanet L. Yellen, Board of Governors

16 Since January 10, 2000 the FOMC issues a statement on its assessment of risks to stability in the foreseeable future. Minutes are available after the next regularly scheduled meeting. In the 1990s after pressure from Congress, the Fed began releasing transcripts of its interest-rate deliberations after a five year lag.transcripts 15

17 16 September 08: The central bank said it was keeping its target for the federal funds rate, at 2 percent. Strains in financial markets have increased significantly and labor markets have weakened further." However, the central bank also remained concerned about inflation pressures. "The downside risks to growth and the upside risks to inflation are both of significant concern to the committee," No change in interest rates Unemployment: Cut rates Inflation: raise rates

18 Profits of each Federal Reserve Bank are distributed to the U.S. Treasury. The Federal Reserve paid ~$78.4 billion of their estimated 2010 net income of $80.9 billion to the U.S. Treasury. 17

19 What does the Federal Reserve Bank consider money? 18 Coins and Paper Money Checking Deposits

20 The fed considers money only the most liquid assets 19

21 M1: Most liquid 1,785Billion M2:less liquid 8,752 Billion M2:less liquid 8,752 Billion Currency (904b) Travelers checks (5b) Demand deposits at banks(495b) Other demand deposits (386b) M2 8,752 Billion M2 8,752 Billion M1 1,785B M1 1,785B Nominal GDP ~ 14,000Billion Velocity of money: Number of times a dollar bill is used M1+ Savings deposits Money market deposit accounts Small time deposits Dollar value of what we bought Number of dollars in circulation Velocity = Nominal GDP/M 1 V = 14,000/1,785 =~ 8 Each dollar was used ~ 8 times during the year

22 21 + All Commercial Banks Demand Deposits at banks M s = Currency held outside banks + Demand Deposits The amount of money in circulation is the Money Supply (904b)(881b) (1,785b)

23 Total Checkable Deposits Money Supply = TCD + Currency

24 23 Goldsmith Certificate = 5 gold pieces

25 24 Goldsmith Certificate = 5 gold pieces Loan = 1 gold piece Loan = 5 gold pieces Loan = 5 gold piece Loan = 5 gold pieces

26 Real Money Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit Your deposit = Money

27 26 First National Bank Your deposit $20,000 Your deposit $20,000 The bank makes loans and holds a portion as reserve in vault. $5,000 2,000 Reserve loans $8,000

28 Now you and other three individuals can write checks up to: 27 20,000 5,000 8,000 20,000 5,000 8,000 38,000 The bank holds only 2,000 If all these payments must be made at the same time, the bank does not have enough in reserves. Only 2,000 support 38,000 in spending!

29 Banks allow several individuals to write checks on the same amount of money… 28 Lending Create Money out of thin air…

30 29 Reserves If r = 10% Reserves 10% Loans = 90% of Deposits If r = 20% Reserves 20% 80% of Deposits A bank r Deposits Withdrawals Loans

31 30 R = D x r D D L=D-R These loans become deposits at another bank (r)

32 Real Money Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit Your deposit D R = D*r L = D-R R = D*r L = D-R R = D*r

33 32 Reserves 59 Deposits all banks 590 Loans in reserves allow banks up to 531 in loans New loans are made. As loans are paid back, r = 10% R = D x r L=D-R R = 590 x 0.1

34 6/12/2014 © 2002 Claudia Garcia-Szekely 33 Why is secrecy necessary in banking?

35 34 Reserves =59B Deposits =590 B Loans 531B There are only $59B in banks reserves supporting $590B in deposits…if everyone tries to cash $590 at the same time there is NOT enough money for everyone… In a business based on confidence, when that confidence evaporates, so does the business.

36 Bear Stearns Press Release Bear Stearns was founded as an equity trading house on May Day Monday, March 10/08

37 On Monday, the firm had about $17 billion in cash. 36

38 In previous weeks, banks such as Goldman Sachs had agreed to stand in for institutions nervous that Bear wouldn't be able to cough up its obligations on deal. In the morning, Goldman Sachs sent its clients an announcing that it would no longer step in for them on Bear deals. 37

39 Bear again tried to reassure investors: The rumors are false, there is no liquidity crisis. No margin calls. It's nonsense." CFO Molinaro on CNBC. 38

40 When word of the Goldman leaked out, the floodgates opened. Hedge funds and other clients, eventually running into the hundreds, began yanking their funds. Bear continued to maintain publicly that all was well. "We don't see any pressure on our liquidity, let alone a liquidity crisis." CEO Alan Schwartz 39 A run on the bank accidentally caused by an ..?

41 The gravity of the situation finally registered at Bear: Liquidity was plummeting: $2 billion at week's end (from 17 billion on Monday!) Even as the firm frantically negotiated a rescue package with J.P. Morgan, Bear executives continued to try to convince the world that everything was under control. That evening Schwartz contacted a well-known New York hedge fund manager to plead with him to appear on CNBC the next morning and express his confidence in Bear. The hedge fund manager declined politely but wondered why Bear needed a client to convince the world of its health…

42 Fed agreed to provide $25 B loan to Bear Stearns (backed by BS assets) To provide liquidity for up to 28 days which the market was refusing to Bear. Fed has a change of heart refused the loan… 41

43 Fed agrees to loan $30 bill to JP Morgan Chase (backed by Bear assets NOT JP assets!) To allow JP to purchase Bear for $2 per share! A staggering loss from $62.30 at closing on Monday March 10 th. In addition, Fed provides a non-recourse loan to JP Morgan for $29 bill 42 Government assumes the risk of Bears less liquid assets… Loan is backed by mortgage debt, government cannot seize JPs assets if mortgage debt becomes insufficient to repay the loan. If BS assets turn a profit, JP pockets the profit. If not, the government takes the loss… If BS assets turn a profit, JP pockets the profit. If not, the government takes the loss… Heads, JP wins… Tails, the taxpayer loses Heads, JP wins… Tails, the taxpayer loses

44 AT 9 A.M., Bear announced $30 billion in funding provided by J.P. Morgan and backstopped by the government. Schwartz still fighting reality: "Bear Stearns has been subject to a significant amount of rumor. Customer requests to cash out "accelerated yesterday... there could be continued liquidity demands that would outstrip liquidity resources." The new loan facility, he said, would restore calm. Of course, that didn't happen: Bear's stock dropped nearly 40% in the first half-hour of trading. Within days, Bear's 85 years as an independent entity were at an end.

45 In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout. Bernanke told them: "If we don't do this, we may not have an economy on Monday. The Emergency Economic Stabilization Act, which implemented the Troubled Asset Relief Program (TARP), was signed into law on October 3,

46 By providing these loans to banks, the government expects banks to make loans to the public 45

47 Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit Total Deposits=800

48 Bank A Loan $ $$ Loan = 1 gold piece Loan Bank B Deposit Bank D Deposit Loan = 1 gold piece Loan Bank C Deposit TARP 700B D D

49 All Banks Reserves Each bank holds a portion of the new deposit as reserves and makes loans that become New deposits… Deposit= All Banks Deposits ?

50 49 Deposits (0.9)= (0.9)= (0.9)= Reserves 700(0.1)=70 630(0.1)=63 567(0.1)=57 510(0.1)=51... SUM of New Deposits = ? SUM of New Reserves = 700 the original deposit. The Change in Deposits = Original Deposit + New Loans Loans

51 50 The stream of deposits generated by the original 700 can be written as: (0.9) (0.9)(0.9) + 700(0.9)(0.9)(0.9) + … (0.9) (0.9)(0.9) + 700(0.9)(0.9)(0.9) + … or (0.9) (0.9) (0.9) (0.9) 4 + … 700 [1+ (0.9) + (0.9) 2 + (0.9) 3 + (0.9) 4 +…] Factor out the 700:

52 This sum of terms can be written: D = 700 [1+ (0.9) + (0.9) 2 + (0.9) 3 + (0.9) 4 +…] Since 1 – 0.9 = 0.1 We can write: 1 r Since 0.1= r We can write: If we keep adding terms…the limit of this sum is: 1 r

53 52 Deposits = x 700 Deposits = 700 x 10 = 7,000 1 r D = New Money X D = 700 [1+ (0.9) + (0.9) 2 + (0.9) 3 + (0.9) 4 +…]

54 53 1 r D = x Original Injection 1 r D = x New Reserves 1 r D = x R Money Multiplier Becomes reserves Multiple by which deposits increase for every $1 increase in reserves

55 D = x 700 L = D - R Increase in Deposits = 7,000 Of these 7,000 in newly created deposits, only 700 is real reserves and the rest 6,300 are loans: money that does not exist. L = 7, = 6,300 How many loans were created?

56 55 All Banks Reserves Each bank holds a portion of the new deposit as reserves and makes loans that become $6,300 in additional deposits Deposit=700 R=700 All Banks Deposits The how much money banks create out of thin air, charge interest and make a clean profit multiplier Multiplier = 10

57 Loans generate additional bank deposits causing an increase in the Money Supply: The increase in the money supply ( M s ) is: The increase in Deposits + increase in the amount of currency held by the public. 56 M s = deposits + currency outside banks M s = Currency + Deposits

58 Federal Reserve Bank Bank Reserves R = 80 Bank Reserves R = 80 R = r D 80 = 0.1 D D =800 R = r D 80 = 0.1 D D =800 Bank Reserves increase to R = R=780 Bank Reserves increase to R = R=780 New Deposit New Loan R = r D 780= 0.1 D D =7,800 R = r D 780= 0.1 D D =7,800 Or: D= R (1/r) D= 700 (1/0.1) D= 7,000 Or: D= R (1/r) D= 700 (1/0.1) D= 7, New Money Money in circulation Deposits D =800 Money in circulation New Deposit New Loan New D = 600+7,000

59 58 Deposits Bank OWNS Loans Reserves Bank OWES AssetsLiabilities Capital = Assets - Liabilities

60 All Banks Reserves R=80b All Banks Deposits D=800b d1= 200b d2= 180b d3=120b d4= 130b d5= 170b M s = Currency held outside banks + Demand Deposits (900b)(800b)(1,700b)

61 M s = Currency held outside banks + Demand Deposits (900b)(7,800b)(8,700b) All Banks Deposits D=600b d1= 200b d2= 180b d3=120b d4= 130b d5= 170b +1,000 D= 7,800 New Money All Banks Reserves R=780b ,000

62 61 In our story, the original 700B deposit would set in motion a chain of loans and deposits at several banks… What if part of the loans are kept as cash and only part of it becomes another deposit at a bank? The deposit expansion will be smaller than (1/r )* R The multiplier: 1/r is the same…but there will be less money for banks to multiply.

63 Required Reserves (RR). The amount that must be held by law, the required reserve ratio times deposits: RR = r(D) Actual Reserves (AR). The amount of reserves actually held by the bank. This could be higher or lower than RR. Excess Reserves(ER). Any amount held above required reserves. 62

64 In our story, banks kept ONLY required amount of reserves (r%) What if one or more banks in the chain hold more reserves than required? The deposit expansion will be smaller than (1/r )* R

65 1. The amount of Excess Reserves held by banks. 2. Currency leak: loans leaking into currency held outside banks 64 The Money Multiplier (1/r) Gives the largest change in deposits that can occur if there is no currency leak no excess reserves.

66 All Banks Reserves R=60b All Banks Deposits D=600b d1= 100b d2= 80b d3=120b d4= 130b d5= 170b When checks are used to make a payment, the money simply changes owner Only new money is multiplied!

67 The FED: Monetary Policy The public: Deposit money previously held as cash. Banks: Lend excess reserves. 66 New Money 700 All Banks Deposits D=590b d1= 100b d2= 80b d3=120b d4= 130b d5= 170b +1,000 D= 7,600 +2,000

68 1.The following is the T-Account for the entire banking system. Banks are fully loaned up r= 7% Reserves = D= 1,000 Loans = The money multiplier is a)Reserves for the entire banking system are a)Loans for the entire banking system are b)If the amount of currency held outside banks by the public is 600,000, the money supply is:

69 1.The following is the T-Account for the entire banking system. Banks are fully loaned up r= 7% Reserves = D= 1,000 Loans = The money multiplier is 1/0.07 = a)Reserves for the entire banking system are 0.07*1,000=70 b)Loans for the entire banking system are D-R =1,000-70=930 c)If the amount of currency held outside banks by the public is 600, the money supply is=Deposits + currency = 1, =1,600

70 1.The following is the T-Account for the entire banking system. Banks are fully loaned up r= 10% Reserves = D= 600b Loans = a)Reserves for the entire banking system are _____ b)Loans for the entire banking system are ________ c)If the amount of currency held outside banks by the public is 700b, the Money Supply is __________

71 D = 700 Currency = 800 r=10% R=70 L= 630 1b previously held as currency by public is deposited into the banking system. D = R x (10)=10 r=10% R=1 L= D – R = 9 M s = =1,500 R = 71D = 710 L = 639 M s = (800-1) + ( ) Ms = M s = Currency + D 1509 M s = R=? L= ? M s = ?

72 2.The following is the T-Account for the entire banking system. Banks are fully loaned up. Currency held outside banks = 500. r = 8% Reserves =D= 1,000 Loans = Suppose that the public deposits in the banking system 100 previously held as currency outside banks. a)Reserves in the banking system (Increase/decrease/remain the same)__________ by ____________ b)Loans in the banking system (Increase/decrease/remain the same)__________ by ____________ c)Deposits in the banking system (Increase/decrease/remain the same)__________ by ____________ d)The money supply (Increase/decrease/remain the same)__________ by ____________

73 2.Currency held outside banks = 500. r = 8%. The public deposits in the banking system 100 previously held as currency outside banks. a)Reserves in the banking system increase by 100 b)Deposits in the banking system increase by 1,250 c)Loans in the banking system increase by 1,150 d)The money supply increase by 1,150 Reserves = D= 1, (1/0.08) = 1,000+ 1,250= 2,250 L = 920 +(1, ) = 2,070 M s = 1,250 +(– 100) = 1,150 R= 80D= 1,000 Loans =920 R=New $ D= New $*(Money Multiplier) L= D- R M s = D + Currency M s = ,000 M s = ,250

74 D = 700 Currency = 800 r=10% R=71 L= 629 1b held as excess reserves by banks is used to make loans D = 1 x (10)=10 r=10% R=0 L= D – R = 10 M s = =1,500 R = 71D = 710 L = 639 AR=71 RR=70 ER=1 AR=71 RR=70 ER=1 M s = Ms = M s = D + Currency 1510 M s = – 0

75 3.The following is the T-Account for the entire banking system. r= 10% Reserves = 190D= 1,000 Loans = Suppose that banks decide to hold only the required amount of reserves. a)Reserves in the banking system (Increase/decrease/remain the same)__________ by ____________ b)Loans in the banking system (Increase/decrease/remain the same)__________ by ____________ c)Deposits in the banking system (Increase/decrease/remain the same)__________ by ____________ d)The money supply (Increase/decrease/remain the same)__________ by ____________ 810

76 3.The following is the T-Account for the entire banking system. r= 10% Actual Reserves = 190 Required Reserves = 100 D= 1, *10 D =1,900 Excess Reserves = 90 Loans = = 1,710 M s =900 Suppose that banks decide to hold only the required amount of reserves. a)Reserves in the banking system remain the same. b)Loans in the banking system Increase by 900 c)Deposits in the banking system Increase by 900 d)The money supply Increase by 900 Reserves = 190D= 1,000 Loans = 810 D= New $*(Money Multiplier) R=0 L= D- R M s = D Reserves = 190D =1,900 Loans = 1,710

77 2.The following is the T-Account for the entire banking system. Banks are fully loaned up. Currency held outside banks = 700b r = 10% Reserves =D= 600b Loans = Suppose that the public deposits in the banking system 50b previously held as currency outside banks. a)Reserves in the banking system (Increase/decrease/remain the same)__________ by ____________ b)Loans in the banking system (Increase/decrease/remain the same)__________ by ____________ c)Deposits in the banking system (Increase/decrease/remain the same)__________ by ____________ d)The money supply (Increase/decrease/remain the same)__________ by ____________

78 3.The following is the T-Account for the entire banking system. r= 10% Reserves = 70bD= 600b Loans = Actual reserves =______; Required reserves= _______;Excess reserves= _________ Suppose that banks decide to hold only the required amount of reserves. a)Reserves in the banking system (Increase/decrease/remain the same)__________ by ____________ b)Loans in the banking system (Increase/decrease/remain the same)__________ by ____________ c)Deposits in the banking system (Increase/decrease/remain the same)__________ by ____________ d)The money supply (Increase/decrease/remain the same)__________ by ____________

79 The reward for those who give up spending today in order to spend tomorrow The cost paid by those who want/need to spend today money they will make in the future The return the bank earns on a loan 78

80 Car loans

81

82 Current law requires the Fed chairman to report to Congress on monetary policy and the economy at least twice a year, and he testifies far more frequently than that. The Federal Banking Agency Audit Act of 1978 put most of the Fed's operations under Government Accountability Office (GAO) purview ( bank supervision, consumer regulation, payment systems.) 81

83 Congress gave the GAO authority to audit emergency credit facilities (designed for the rescue of individual institutions such as AIG and Bear Stearns) Congressional auditors have been blocked from reviewing the Fed's monetary policy operations, direct lending to banks, loans to foreign governments and other international financing organizations since 1978, when a law was passed to shield the central bank from politics. 82

84 83 The House Financial Services Committee approved (43-26) a measure (sponsored by Texas Republican Ron Paul) that would direct the congressional GAO to expand its audits of the Fed to include decisions about interest rates and lending to individual banks. were

85 Requires the GAO to conduct an audit by the end of 2010 and report findings to congress. Overrides a law that shields the Fed's monetary-policy decisions from GAO inquiries. The Comptroller General may now audit actions taken to extend credit to a single and specific partnership or corporation. 84

86 The audit would detail who the Fed lends to, how much it lends and what agreements it has with foreign central banks and financing organizations. Proponents want the Fed to be audited at least annually. GAO audits could publicly reveal reams of information that now remain private, sometimes indefinitely: The Fed doesn't identify banks to whom it lends directly for fear of sparking a run on the bank. 85

87 It would be a major loss to the country if the Fed were incapable of running an independent monetary policy. If you have the GAO, after the fact, offering its opinions on whether a certain monetary policy action is correct or incorrect, the active deliberations that are so critical to building a meaningful consensus at the FOMC will begin to become unhelpfully cautious. Former Fed Chairman Alan Greenspan 86 Threatens Feds ability to make monetary policy without political interference.

88 87 SupportOppose Campaign for Liberty Public Citizen Americans for Tax Reform U.S. Public Interest Research Groups Wells Fargo Morgan Stanley J.P. Morgan Deutsche Bank Ford Motor Company Comerica Bank

89 The transparency Act was combined into The Wall Street Reform and Consumer Protection Act of Passed the House on December 11, 2009 on a vote of The vote was mostly along party lines, with no Republicans voting for the bill. Paul, objecting to some of the provisions of the combined bill, voted against passage despite the inclusion of the audit provisions he had been proposing for years… 88

90 While I respect his independence … I hope that independently he will consider that my views are the ones that should be followed." 89

91 Spain New ZealandItaly UK Australia France/Norway/Sweden Denmark Japan Canada NetherlandsBelgiumUNITED STATES Switzerland Germany LessMore

92 Where does it come from? Who controls it? Why it has value? Why it loses value? 91


Download ppt "Interactive journey through the Federal Reserve: Fed 101Fed 101 1."

Similar presentations


Ads by Google