1 senatehouse 53democrats 45republicans 2 independent (vice-president votes in case of a tie) 200...
TRANSCRIPT
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SenateHouse
53Democrats45Republicans2 independent(Vice-president votes in case of a tie)
200 Democrats232 Republicans0 Independent
100 Senators17 women
435 Members78 women
Interactive journey through the Federal Reserve: Fed 101
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Ben S. Bernanke, Board of Governors, Chairman William C. Dudley, New York, Vice Chairman James Bullard, St. Louis Elizabeth A. Duke, Board of Governors Charles L. Evans, Chicago Esther L. George, Kansas City Jerome H. Powell, Board of Governors Sarah Bloom Raskin, Board of Governors Eric S. Rosengren, Boston Jeremy C. Stein, Board of Governors Daniel K. Tarullo, Board of Governors Janet L. Yellen, Board of Governors
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President reviews requests for funding and formulates his budget
February–December 2009
Budget preparation and transmittal to Congress
December 2009 -February 2010
Congress reviews President’s 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 1st 2010 – September 30, 2011
From February
2009 when the decision is made….
To October 2010 when the
actual spending takes
place!.
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.
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The Government and Congress
The Federal Reserve Bank
Changing taxes and spending
Changing credit conditions in the economy.
The Federal Reserve SystemCreated on December 23,
1913 by an Act of Congress.
District Banks are owned by member banks in the district.
District Banks are owned by member banks in the district.
Board of Governors (7)
Federal Open Market
Committee (FOMC) (5)
4 bank presidents and President of the New York Fed
4 bank presidents and President of the New York Fed
12 Regional Bank
Presidents
(7+5)
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 Regio
nal Banks
Federal Open
Market Committee (FOMC)
(7+5)
Janet L. Yellen: Chairman
(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.
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.
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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.
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Decisions are made
very slowly
Decisions can be made quickly to
respond to the day to day
events as they develop.
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 FED
when it created the central bank in 1913 Serve as the bank for the U.S. government
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Goldsmith
Certificate = 5 gold pieces
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Goldsmith
Certificate = 5 gold pieces
Loan = 1 gold piece
Loan = 1 gold piece
Loan = 1 gold piece
Loan = 5 gold pieces
Loan = 5 gold piece
Loan = 5 gold pieces
Loan = 5 gold pieces
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First National Bank
Your deposit$20,000
The bank makes loans and holds a portion as reserve in vault.
$5,000
$5,000
2,000Reserve
loans
$8,000
Real Money
Bank A
Loan
Loan
Loan
Loan
Loan $
$ $
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
Loan
Loan
Bank B
Deposit
Deposit
Deposit
Deposit
Deposit
Bank D
Deposit
Deposit
Deposit
Deposit
Deposit
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
LoanBank
C
Deposit
Deposit
Deposit
Deposit
Deposit
Your deposit
= Money
Now you and other three individuals can write checks up to:
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20,0005,0005,0008,000
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!
Banks allow several individuals to write checks on the same amount of money…
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Lending Create Money
out of thin air…
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M1: Most liquid
1,785Billion
M2:less liquid8,752 Billion
Currency (904b)Travelers checks (5b)Demand deposits at banks(495b)Other demand deposits (386b)
M28,752 Billion
M11,785B
Nominal GDP ~ 14,000Billion
Velocity of money: Number of times a dollar bill is
used
M1+Savings deposits Money market deposit accountsSmall time deposits
Dollar value of what we boughtDollar value of
what we boughtNumber of dollars in
circulation
Number of dollars in
circulation
Velocity = Nominal GDP/M1
V = 14,000/1,785 =~ 8Each dollar was used ~ 8
times during the year
The fed considers money only the most ‘liquid’ assets
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+All Commercial Banks
Demand Deposits at
banks
Ms = Currency held outside banks + Demand DepositsThe amount of money in circulation is the Money Supply
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If r = 10%Loans = 90% of
Deposits
If r = 20%80% of
Deposits
A bank
r
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These loans become deposits at another bank
(r)
Real Money
Bank A
Loan
Loan
Loan
Loan
Loan $
$ $
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
Loan
Loan
Bank B
Deposit
Deposit
Deposit
Deposit
Deposit
Bank D
Deposit
Deposit
Deposit
Deposit
Deposit
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
LoanBank
C
Deposit
Deposit
Deposit
Deposit
Deposit
Your deposit
D
R = D*rR = D*rL =
D-R
L =
D-R
R = D*rR = D*rL =
D-R
L =
D-R
L =
D-R
L =
D-R
R = D*rR = D*r
R = D*rR = D*r
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Reserves59
Depositsall banks
590
Loans531
59 in reserves allow banks up to 531 in loans
New loans are made.
As loans are paid back,
r = 10%r = 10%
R = D x r
L=D-R
R = 590 x 0.1R = 590 x 0.1
04/19/23© 2002 Claudia Garcia-Szekely
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Why is secrecy necessary in banking?
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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.
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, 2008
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By providing these loans to banks, the government expects banks to make loans to the public
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Bank A
Loan
Loan
Loan
Loan
Loan $
$ $
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
Loan
Loan
Bank B
Deposit
Deposit
Deposit
Deposit
Deposit
Bank D
Deposit
Deposit
Deposit
Deposit
Deposit
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
LoanBank
C
Deposit
Deposit
Deposit
Deposit
Deposit
All Banks Deposits=8
00
All Banks Deposits=8
00
Bank A
Loan
Loan
Loan
Loan
Loan $
$ $
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
Loan
Loan
Bank B
Deposit
Deposit
Deposit
Deposit
Deposit
Bank D
Deposit
Deposit
Deposit
Deposit
Deposit
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
LoanBank
C
Deposit
Deposit
Deposit
Deposit
Deposit
TARP 700BTARP 700B
Bank A
Loan
Loan
Loan
Loan
Loan $
$ $
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
Loan
Loan
Bank B
Deposit
Deposit
Deposit
Deposit
Deposit
Bank D
Deposit
Deposit
Deposit
Deposit
Deposit
Loan = 1 gold piece
Loan = 1 gold piece
Loan
Loan
Loan
LoanBank
C
Deposit
Deposit
Deposit
Deposit
Deposit
700700
700(0.9
)
700(0.9
)700(0
.9)
(0.9
)700(0
.9)
(0.9
)
700(0.9
)(0.0
)
(0.9
)
700(0.9
)(0.0
)
(0.9
)
TARP 700BTARP 700B
700(0.9
)
700(0.9
)
700(0.9
)
(0.9
)700(0
.9)
(0.9
)
700(0.9
)(0.0
)
(0.9
)
700(0.9
)(0.0
)
(0.9
)
700700
700(0.9
)
700(0.9
)
700(0.9
)
(0.9
)700(0
.9)
(0.9
)
700(0.9
)(0.0
)
(0.9
)
700(0.9
)(0.0
)
(0.9
)
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1r D = x Original
Injection
1
r D = x New
Reserves
1
r D = x R
Money
Multiplier
Multiple by which deposits increase for every $1 increase in
reserves
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1
0.1 D = x 700
L = D - R
Increase in Deposits = 7,000Of these 7,000 in newly created deposits, only
700 is “real reserves” and the rest6,300 are loans: money that does not exist.
L = 7,000- 700 = 6,300
How many loans were created?
Fed injects $700, banks create
$6,300 out of thin air…
Loans generate additional bank deposits causing an increase in the Money Supply:
The increase in the money supply ( Ms) is:
The increase in Deposits + increase in the amount of currency held by the public.
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Ms = deposits + currency outside banks
Ms = Currency + Deposits
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Deposits
Bank OWNS
Loans
Reserves
Bank OWESAssets Liabilities
Capital = Assets - Liabilities
All BanksDeposits
D=800bd1= 200bd2= 180bd3=120bd4= 130bd5= 170b
Ms = Currency held outside banks + Demand Deposits(900b) (800b)(1,700b)
900b
7,800b
8,700b)
+1,000
D= 800 + 7,000
New Money
700
+2,000
+2,000+2,000
Ms = Currency held outside banks + Demand Deposits(900b) (800b)(1,700b)
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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.
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.
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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
1. The amount of Excess Reserves held by banks.2. Currency leak: loans leaking into currency held
outside banks
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The Money Multiplier (1/r)
Gives the largest change in deposits that can occur if there is no currency leak no excess reserves.
All BanksDeposits
D=600b
d1= 100bd2= 80bd3=120b
d4= 130bd5= 170b
When checks are used to make a payment, the money simply changes “owner”
Only new money is multiplie
d!
The reward for those who give up spending today in order to spend tomorrowThe cost paid by those who want/need to spend today money they will make in the futureThe return the bank earns on a loan
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