1. The Federal Reserve System: History and Structure
Lesson 31
Sections 26,27

2. The Federal Reserve System
The Federal Reserve (“The Fed”) is a Central Bank
Bank of England, Bank of Japan, European Central Bank
Created in 1913 as a response to repeated banking crises, including the panic of 1907.
Trusts (less regulated banks that speculated with depositors money)
Commercial Banks
Investment Banks

3. Structure of the Fed
The Federal Reserve (known as the Fed) is composed of 12 district reserve banks (by geographical area), and some 4000 private banks and 25,000 other depository institutions under some government control. The control comes from a board of governors appointed by the president with advise and consent of the senate. Members of the board serve for 14 years, and the chairman of the board is selected from among them to serve for 4 years.

4. Savings and Loan Crisis 1980’s
Savings and Loans were designed to take savings and turn them into home loans.
Deregulation led to serious abuses of the system, causing a collapse of the S&L’s and costing taxpayers $124 Billon.

5. The Financial Crisis of 2008
Long Term Capital Mismanagement
Subprime Lending and the Housing Bubble
Leverage
Ratio of assets to borrowed money for reserve.
De-Leverage
Process of trying to sell assets to raise cash to pay debts causing reduction in asset values, which in turn reduces the assets in the reserve, forcing a liquidity crises
Securities
Packages of home loans, credit card debt, student loans, etc.
Derivatives
Bets on just about anything
Crisis and Response
AIG
Mergers and Bailouts

7. Functions of the Federal Reserve System
Provide Financial Services
Supervise and Regulate Banking Institutions
Maintain the Stability of the Financial System
Conduct Monetary Policy

8. What the Fed Does Reserve Requirements The Discount Rate
Federal Funds Market
Financial Market that allows banks that fall short on the reserve requirement to borrow from banks that have an excess reserve
Federal Funds Rate
Interest rate set by the Fed
The Discount Rate
Banks in need of reserve can also borrow from the Fed itself (normally 1 % above the Fed Funds Rate)
Open Market Operations
Buying Federal Bonds