1. WARM UP WHAT ADVICE WOULD YOU GIVE SOMEONE WHO’S AFRAID OF KEEPING THEIR MONEY IN THE BANK?

2. Current Events Janet Yellen sworn in as US Federal Reserve chair "Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics," Mr. Akerlof wrote in a biographical note after winning the Nobel Prize in Economics in 2001.biographical note

3. It’s a Wonderful Life http://www.youtube.com/watch?v=lbwjS9iJ2Sw Take a moment and watch.

4. Module 26 The Federal Reserve System

5. History of the Federal Reserve Central Bank: institution that oversees and regulates the banking system and controls the monetary base. The FED is the central bank of the US. Bank of England is the central bank of England; European Central Bank is the EU central bank. ______________________________________________ Panic of 1907 (Knickerbocker Trust & J.P. Morgan) bank run due to bank trusts speculating and investing in risky investments. Collapse caused 4yr recession. Millionaire JP Morgan bailed out the bank with his funds and the help of John D Rockefeller and the US Treasury. Fed System enacted 1913. Both private (12 regional banks) and government agency (Federal Reserve Board appointed by President and approved by Senate)

6. Structure of the FED Board of Governors:Washington,DC Seven members appointed by President and approved by Senate Members serve 14 years (to protect against political influence) Chairman serves 4 years (but often reelected) Oversees entire system 12 Regional Banks: Serve a region; Federal Reserve District Each has Board of Directors chosen from community Most important: NY, carries out open-market operations Audit books of private-sector banks

7. Federal Open Market Committee  makes decisions about monetary policy  Board of governors plus five regional bank presidents (always includes NY) http://www.federalreserve.gov/faqs/f aq.htm

9. Federal Reserve System

10. Federal Reserve Bank of Richmond Federal Bank of Richmond has two offices located in Charlotte and Baltimore. The Federal Reserve Bank of Richmond’s Charlotte Branch is an operational and regional center for the Carolinas, including the nation’s second largest financial center in Charlotte, NC.

11. Federal Reserve Board of Governors and Regional Presidents

12. Past and Present Fed Chairmen Left to right: Janet Yellen; current chairwoman, Alan Greenspan, Ben Bernanke And Paul Volker.

13. The Letter and Number on the bills will indicate where they were circulated from but remember the treasury department actually prints the bills themselves at the Mints

14. Role of the Fed: Controlling bank reserves Carrying out monetary policy Supervising and regulating banks Holding reserves for commercial banks

15. The Financial Crisis of 2008- can’t blame this on George W. Bush LTCM (1994) Large hedge fund company in the 1990’s. Unregulated business that made riskier investments than mutual funds and promised big returns Borrowed money (leverage) to increase returns Involved in derivatives(complex financial instruments that enhance trade but risky because its hard to measure their value) If you get curious check out the websites https://www.youtube.com/watch?v=N9YLta5Tr2A https://www.fdic.gov/bank/analytical/fyi/2003/032603fyi.html

16. What happened to LTCM? Financial crisis in 1997 and 1998 in Russia and Asia sent ripple effects through financial markets. LTCM’s investors wanted the return on their investments LTCM could not meet the demand, had to sell off assets which causes a collapse. Cascading effect begins. Balance of sheet effect: reduction in a firm’s net worth from falling asset prices. LTCM’s losses begin to effect other major banks. New York Federal Reserve Bank stepped in to bailout LTCM and prevent a crisis. Crisis proved that hedge funds can fail

17. Subprime Lending and the Housing Bubble. 2003 US interest rates are 3%. Due to Fed policies and increase capital from China. Low interest rates cause housing boom!! 1990’s Mortgage lending practices and regulations are relaxed as Congress pushes the Community Reinvestment Act to increase home ownership. Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac were created as a partially private corporation backed by the US Government to buy loan bonds or buy the mortgages outright from banks. Congress created a regulation and monitoring agency called the OFHEO that reported to the Banking Committee’s in the Congress and exempted them from reporting to the Securities Exchange Commission (SEC).

18. And it keeps on going and going http://www.nytimes.com/1999/11/13/business/clinton- signs-legislation-overhauling-banking-laws.html http://www.nytimes.com/1999/11/13/business/clinton- signs-legislation-overhauling-banking-laws.html Bill Clinton signs the Gramm-Leach-Bliley Act: Law deregulated the banking industry. Subprime Lending: Banks and mortgage companies begin making home loans to people who didn’t meet the usual criteria for borrowing. Securitization: pool of loans assembled and shares of that pool are sold to investors.

19. And the Bubble Burst People began to default on mortgages they could not pay Investors took heavy losses Many mortgages were in banks but others were in non- banks and thus not as insured and more vulnerable to the crisis. Mortgage related losses cause a collapse of trust in the financial system—Known as the TED Spread TED spread: difference between the interest rate on 3 mo loans that banks make to one another and the interest rate the federal government pays on a 3 mo. Loan. TED spread shows how much risk banks think they are taking on when they lend to each other

20. Bush and Obama Both the Bush and Obama administration used the Federal Reserve and the US Treasury to bail out and stabilize the economy. Dodd-Frank Bill: passes to regulate banks and prevent some of the abuses that led to the housing crisis. http://www.investopedia.com/terms/d/dodd-frank-financial- regulatory-reform-bill.asp http://www.investopedia.com/terms/d/dodd-frank-financial- regulatory-reform-bill.asp Critics claim it overregulates and does not fix the major problems of Freddie Mac and Fannie Mae.

21. Check for Understanding Which of the following is a part of both the Federal Reserve System and the federal government? A. Federal Reserve Board of Governors B.12 regional Federal Reserve Banks C. The Reconstruction Finance Corporation D. Commercial banks E. The Treasury Department

22. Which of the following contributed to the financial crisis of 2008? A. subprime lending B. securitization C. deleveraging D. low interest rates leading to a housing boom E. All of the above

23. What does the Board of Governors of the Federal Reserve System do?