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Monetary Policy and Federal Reserve
What is Money?
• Money is what people use to
buy things and services and
what they take for selling their
own things or services.
• Money is also called many
other names, like currency or
cash.
• Most of the time a state or
government prints paper
money and makes coins at a
special place called a mint.
What gives money its value?
• YOU!!!
• The faith you place on the dollar bill gives
money its value.
• The money you have in your wallet, is not
backed up by anything. The faith you have
that it is worth something is what gives money
its value.
The Bank
What is a bank?
According to
Britannica.com,
A bank isan institution that
deals in money and its
substitutes and provides
other financial services.
Banks accept deposits and
make loans and derive a
profit from the difference
in the interest rates paid
and charged, respectively.
How the Bank makes profit?
There are three main ways
banks makes money:
1. by charging interest on
money that they lend.
2. by charging fees for
services they provide and
3. by trading financial
instruments in the
financial markets
(stocks).
Remember
• DEBT= MONEY
• By charging you interest the banks make
money!!!
• Interest is the percentage banks charge you
for taking a loan. You end up paying WAY more
than what you borrowed.
• This is how money is also generated by banks!
Through INTEREST!!!
Fractional Reserve
Fractionalreserve banking
is the practice where a
bank retains reserves
in an amount equal to
only a portion of the
amount of tis
customers deposits to
satisfy potential
demands for
withdrawals.
Federal Reserve
The Federal Reserve System, or "the Fed,"
is the central bank of the United States. It
was created by the Congress to provide
the nation with a safer, more flexible, and
more stable monetary and financial
system. The Federal Reserve was created
on December 23, 1913, when President
Woodrow Wilson signed the Federal
Reserve Act.
What is Monetary Policy?
• Monetary policy is the process in which a country
decides the flow of money and the economic
decisions it must make to keep the economy healthy.
In the U.S, the decision making mainly comes for the
The FED.
Federal Reserve Bank
• Central bank of the United States.
• Decentralized formal structure.
• A single bank located in Washington D.C. with
12 regional banks.
Federal Reserve – Technically Independent
• Long and staggered terms of governors.
• Earns more from operations than it needs to cover
operating expenses - does not have to ask Congress for
funds.
• Not directly subject to control by the executive and
legislative branches of government.
• Federal Reserve banks are privately owned.
The Federal Open Market Committee
• Chief policy-making body of the Federal Reserve
System.
• Primary task: Draft monetary policy.
• Voting Members
– all seven governors
– the president of the NY Fed
– 4 presidents of the other eleven regional Banks. The right
to vote rotates among the 11 presidents - each voting for a
period of one year. All presidents attend meetings.
• Meets about 8 times a year to formulate monetary
policy.
• Decisions in the form of policy directives are passed
on for execution to the NY Fed.
The Federal Reserve + Inflation
• Inflation means that the general level of
prices is going up, which means more money
will be needed to pay for goods. Example: Like
a loaf of bread.
• Economist measure inflation regularly to know
an economy’s state.
• The Federal Reserve controls this by deciding
how much money they print.
Basically
• The Federal Reserve is basically the national bank that
is controlled by a group of governors, and overseen by
Congress. They control inflation, and the amount of
credit banks are allowed to give out.
• They do monetary policy.
• Supervise Banks.
• Stabilize the Economy.
• Oversee payments of U.S loans and money printing.
You
Get a Loan form
the bank, but…
Then the IRS
collects taxes from
…
The FED buys bonds with
interest and either keeps
them or sells them to
foreign investors.
To pay the
DEBT from the
THE FEDERAL
RESERVE
The Government then
sells bonds to the FED to
pay for services and
other debt.
Since Banks function
under Fractional
Reserves. The bank has
to borrow money form
THE FED!
The FED then
prints money from
the U.S Mint
Raising Inflation and
causing things to get
more expensive for
citizens and the U.S
government.
The House Bubble in 2006
The way to make money for
banks is to make more debt,
charge more interest, and
make more loans.
Before 2006 de-regulation
happened, meaning less rules
for banks and less government
checking on them.
This created a free for all for
banks and they lend money to
people with bad credit and hid
them calling Prime AAA loans.
• Other banks around the world and in the United
States saw this loans though they were good
(because of the seal of approval :AAA) and
bought them thinking they will get there returns
back, plus they believed that house prices would
keep going up.
• However, the AAA rating was not truthful and
billions of dollars were lost when people did not
pay back. Causing the collapse of huge
companies such as IndyMAC and bailouts to
Lehman Brothers
• And for many of us it resulted in Foreclosure…
Foreclosure
Foreclosure- Simply, foreclosure is the process by which a
homeowner’s rights to a property are forfeited because of failure
to pay the mortgage. If the owner cannot pay off the outstanding
debt or sell it via short sale, the property then goes to a
foreclosure auction. If the property does not sell at auction, it
becomes the property of the lending institution.
Whose Fault?
•
•
•
•
•
Banks?
People?
Government?
Capitalism?
Investors?