* 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?