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Chapter 20

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					        *
        Chapter Twenty


                   *
  Money,
 Financial
Institutions
  and the
  Federal
 Reserve
                                 *
            BEN BERNANKE             Profile

               Federal Reserve
                                               *
• A former economics
  professor at Princeton.
• Former President George W.
  Bush appointed him
  Chairman of the Federal
  Reserve in 2006.
• Almost every factor related
  to the economy is influenced
  by the choices he makes.
                                           *What is
            WHAT’S MONEY?                    Money?

                                                 LG1
                                                       *
• Money -- Anything people generally accept as
  payment for goods and services.


• Barter -- The direct trading
  of goods or services for other
  goods or services.
                             *What is
         STANDARDS for a      Money?
      USEFUL FORM of MONEY        LG1
                                        *
• Portability

• Divisibility

• Stability

• Durability

• Uniqueness
                                               *What is the
          The MONEY SUPPLY                      Money
                                                Supply?
                                                      LG2
                                                              *
• Money Supply -- The amount of money the Federal
  Reserve makes available for people. The money
  supply is referred to as:

  - M1 -- Money that can be accessed quickly (coins,
     paper money, travelers’ checks, etc.).

  - M2 -- M1 + money that may take a little time to
     obtain (savings accounts, mutual funds, etc.).

  - M3 -- M2 + big deposits like institutional money
     market funds.
                                                                  *What is the
           HOW LONG DOES                                               Money
                                                                       Supply?
         PAPER MONEY LAST?                                                LG2
                                                                                 *
                   Bill                            How Long it Lasts

                    $1                                21 Months

                    $5                                16 Months

                   $10                                18 Months

                   $20                                24 Months

                   $50                                55 Months

                  $100                                89 Months


Source: Federal Reserve, www.federalreserve.gov.
                                                                                 *What is the
              MONEY MILESTONES                                                      Money
                                                                                    Supply?
                                                                                       LG2
                                                                                                *
Year                                                Milestone

1956                              Congress set the minimum wage at $1 an hour

1960                $10 million presidential campaign by candidate Richard Nixon

1985                          $100,000 bottle of wine sold at auction at Christie’s

1995           $1 million cost for a 30-second commercial during Super Bowl XXIX

2001                                       $10 movie ticket in New York

2004                              $100 million Picasso painting sold at Sotheby’s

2007                               $1 billion stadium built in London (Wembly)


   Source: Conde Nast Portfolio
                                                  *The Global
                                                   Exchange of
EXCHANGING MONEY GLOBALLY                          Money
                                                       LG2
                                                                *
• Falling dollar value: The amount of goods and
  services you can buy with a dollar decreases.

• Rising dollar value: The amount of goods and
  services you can buy with a dollar increases.

• What makes the dollar fall or rise is the position
  of the U.S. economy relative to other global
  economies.
                                            *The Global
            The IMPACT of a                  Exchange of
                                             Money
           FALLING DOLLAR                        LG2
                                                          *
• Overseas demand for U.S. products rise.

• A favorable exchange rate for U.S. companies
  earning profits in foreign markets is provided.

• U.S. tourism increases which is good for hotels,
  resorts, theme parks, and retailers that serve
  international travelers.
                             *Basics About
   FIVE MAJOR PARTS of the    the Federal
                              Reserve
  FEDERAL RESERVE SYSTEM          LG2
                                            *
1. The Board of Governors
2. The Federal Open
   Market Committee
3. 12 Federal Reserve
   Banks
4. 3 Advisory Councils
5. The member banks of
   the system
                         *Basics About
The 12 FEDERAL RESERVE    the Federal
                          Reserve
     DISTRICT BANKS           LG2
                                        *
                                                 *Basics About
 MANAGING the MONEY SUPPLY                         the Federal
                                                   Reserve
                                                       LG2
                                                                 *
• The Fed uses three basic tools:

  1. Reserve Requirement -- A percentage of
      commercial banks’ checking and savings accounts
      they must keep in the bank or in non-interest-bearing
      deposits at the local Federal Reserve district bank.

  2. Open-Market Operations -- The buying and
      selling of government bonds.

  3. Discount Rate -- The interest rate the Fed charges
      for loans to member banks.
                                             * Progress
      PROGRESS ASSESSMENT                      Assessment


                                                          *
• What’s money?

• What are the five characteristics of useful money?

• What’s the money supply, and why is it important?

• How does the Federal Reserve control the money
  supply?

• What are the major functions of the Federal
  Reserve? What other functions does it perform?
                          *Basics About
  CHECK-CLEARING PROCESS      the Federal
                              Reserve
THROUGH the FEDERAL RESERVE       LG2
                                            *
                                           *The History of
The ESTABLISHMENT of the FEDERAL            Banking and the
                                            Need for the
                                            Fed
        RESERVE SYSTEM          LG3
                                                         *
 • A cash shortage problem in 1907 led to the
   creation of the Federal Reserve System.

 • Under the Federal
   Reserve Act of 1913,
   all federally chartered
   banks had to join the
   Federal Reserve.
                                               * The History of

    LARGEST BANK FAILURES                        Banking and the
                                                 Need for the
                                                 Fed
                                                     LG3
                                                              *
           Bank                Year     Assets

  Washington Mutual Bank       2008   $307 Billion

  Continental Illinois NB&T    1984   $67 Billion

  First Republic Bank Corp     1986   $49 Billion

American Savings & Loan Assn   1988   $45 Billion

       IndyMac Bank            2008   $32 Billion
                              *The U.S.
    The U.S. BANKING SYSTEM    Banking
                               System
                                   LG4
                                          *
• Commercial banks

• Savings and loan
  associations

• Credit unions

• Nonbanks
                                              *Commercial
        COMMERCIAL BANKS                       Banks

                                                     LG4
                                                           *
• Commercial Bank -- A profit-seeking organization
  that receives deposits from individuals and
  corporations in the form of checking and savings
  accounts and uses those funds to make loans.

• A commercial bank has two types of customers:
  1. Depositors
  2. Borrowers
                                                 *   Services

         COMMERICAL BANKS’                           Provided by
                                                     Commercial
                                                     Banks
             SERVICES                                    LG4
                                                                   *
• Demand Deposit -- The technical name for a
  checking account; money is available on demand
  from the depositor.

• Time Deposit -- A savings account; a bank can
  require a prior notice before you make a withdrawal.

• Certificate of Deposit -- A savings account that
  earns interest, to be delivered on the certificate’s
  maturity date.
                                             *
       WHAT to TELL the TELLER
              Making Ethical Decisions
                                                  *
• The bank teller mistakenly gives you $320
  instead of the $300 you asked for.

• You bring the error to her attention, but she
  disagrees she miscounted the money.

• You wonder whether to just keep the extra $20
  even though you know her accounts will not
  balance at the end of the day.

• What are your alternatives? What do you do?
                                                *Savings and
            SAVINGS and                          Loan
                                                 Associations
         LOAN ASSOCIATIONS                              LG4
                                                              *
• Savings and Loan Associations (S&Ls) -- A
  financial institution that accepts both savings and
  checking deposits and provides home mortgage
  loans.

• Often known as thrift institutions because their
  original purpose was to promote customer thrift
  and home ownership.
                                                   *
                                                    Credit
              CREDIT UNIONS                         Unions

                                                          LG4
                                                                *
• Credit Unions -- Nonprofit, member-owned
  financial cooperatives that offer the full variety of
  banking services to their members.


• As nonprofits, credit
  unions enjoy an
  exemption from federal
  income taxes.
                                               *Other
                 NONBANKS                       Financial
                                                Institutions
                                                    LG4
                                                               *
• Nonbanks -- Financial institutions that accept no
  deposits, but offer many of the services provided by
  regular banks. Nonbanks include:
   - Life insurance companies

   - Pension funds

   - Brokerage firms

   - Commercial finance companies

   - Corporate financial services
                                   *Other
   WHAT ATTRACTS CUSTOMERS          Financial
                                    Institutions
      to ONLINE BANKING
                                        LG4
                                                   *
• Free identity theft protection
• Free credit score monitoring
• Personal financial
  management
• Instant messaging service
• Bank’s blog


     Source: www.comscore.com.
                                          * Progress
     PROGRESS ASSESSMENT                    Assessment


                                                       *
• Why did the U.S. need a Federal Reserve Bank?

• What’s the difference between a bank, a savings
  and loan association, and a credit union?

• What’s a consumer finance company?
                                            *
    HOW the BANKING CRISIS
   AFFECTED SMALL BUSINESS
            Spotlight on Small Business              *
• The tightening of loan money led small
  businesses to seek alternative sources of funds.

• Angel investors can be a source of funds for
  some firms, especially high-growth firms in
  technology or biotech.

• Peer-to-peer lending is an alternative source of
  capital.
                                                *Protecting
           PROTECTING                            Your Funds
        DEPOSITORS’ MONEY                            LG5
                                                              *
• The Federal Deposit Insurance Corporation
  (FDIC) -- An independent agency of the U.S.
  government that insures bank deposits up to
  $100,000 ($250,000 until December 2013).

• The Savings Association Insurance Fund
  (SAIF) -- Insures holders of accounts in savings and
  loan associations.

• The National Credit Union Administration
  (NCUA) -- Provides up to $100,000 coverage per
  individual depositor per institution.
                                            *
          The BANKING CRISIS
            GOES GLOBAL
           Reaching Beyond Our Borders                 *
• The banking crisis of 2008-2009 wasn’t limited to
  the U.S., even high growth nations felt the pinch.

• The International Monetary Fund (IMF) has
  received requests from countries like Pakistan,
  Ukraine, Hungary, Turkey, and Bahrain.

• Many nations are wondering where future funds
  will come from.
                                              *   Using Technology
       TECHNOLOGICAL                              to Make Banking
                                                  More Efficient
   ADVANCEMENTS in BANKING                             LG6
                                                               *

• Electronic Funds Transfer System -- Messages
  about a transaction are sent from one computer to
  another so firms can transfer funds quickly and more
  economically.

• Debit Card -- Serves the same function as a check;
  it withdrawals funds from a checking account.
                                                  *
                                                  Using Technology
             SMART CARDS                          to Make Banking
                                                  More Efficient

                                                       LG6
                                                               *
• Smart Card -- A combination of a credit card, debit
  card, phone card, driver’s license, and more.
                                                *International
     MAKING TRANSACTIONS in                      Banking and
                                                 Banking Services
       OTHER COUNTRIES                               LG7
                                                             *
• Letter of Credit -- A promise by the bank to pay the
  seller a given amount if certain conditions are met.

• Banker’s Acceptance -- A promise the bank will
  pay some specified amount at a particular time.

• Money exchange allows companies to go to a
  bank and exchange currencies to use in a
  particular country (i.e. dollars for euros).
                                              * International
     LEADING INSTITUTIONS in                    Banking and
                                                Banking Services
     INTERNATIONAL BANKING                          LG7
                                                            *
• World Bank -- Lends most of its money to less-
  developed nations to improve their productivity and
  help raise standards of living and quality of life.

• International Monetary Fund (IMF) -- Fosters
  cooperative monetary policies that stabilize the
  exchange of one national currency for another. About
  185 countries are a part of the IMF.
                                           * Progress
     PROGRESS ASSESSMENT                     Assessment


                                                        *
• What are some of the causes for the banking
  crisis of 2008-2009?

• What’s the role of the FDIC?

• How does a debit card differ from a credit card?

• What’s the World Bank and what does it do?

• What’s the IMF and what does it do?

				
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