Download Money and Banking - Cameron Economics

ST. FRANCIS COLLEGE
Course Title and Course Number: Money and Banking/ ECO 2306
Course Credits & Prerequisite: Three Credits/ ECO 1201
Course Hours: Wednesdays, 6-9PM
Course Location: tbd
Course Instructor: Cameron M. Weber
Office Hours: before class and by appointment
Office Hours Location: 4201
E-mail Address: [email protected]
Website: cameroneconomics.com (relevant class materials found under “teaching” page)
Course description in catalogue: Money and credit; commercial banking; central banking;
monetary theory and practice; financial regulation.
Course Objectives:








learning financial terms and concepts
exploring the role of money in the economy
studying financial institutions and markets; and how they are related to each other
understanding the concept of interest, and calculation of interest rates based on yield to
maturity
examining the behavior of interest rates with respect to factors responsible for changing
equilibrium interest rates
studying the U.S. banking industry: its history, structure, and regulation
understanding the Federal Reserve System with respect to its structure, economic goals,
monetary targets, and monetary tools
developing a critical approach to the conduct of the monetary policy of the Fed, and its
impact on the contemporary U.S. economy
Course Outline:
Prequel: Review of “thinking like an economist”
I. Keynesian vs. Hayekian ideal-types: aggregate modeling vs. growth economics
II. Keynesian vs. Hayekian ideal-types: differing views on business cycle, economy as a
system vs. economy as process, stability vs. creative destruction
Lecture, Hayek vs. Keynes youtube, Quantitative Easing Explained youtube
PART I:
Introduction to Money and Banking
I. Functions of money
Chapter 3
II. Money and capitalism in historical context; early capitalism and
the gold standard, modern capitalism, Bretton Woods and fiat money
Ch. 2 & 21, Lecture
III. Relationship between money and the real economy; classical equation of
Exchange (MV=PQ); velocity of money; Keynesian, Monetarist, Austrian
views on money supply effects; “skyscraper index”
Ch. 1& 22, Lecture
IV. Distributional effects of inflation
Doug French youtube, Lecture
V. Evolution of payments system; commodity money, fiat money, checks,
electronic payments, e-money
Ch. 3
VI. Class discussion on Bitcoins
VII.
Definition of money supply, M1, M2, MZM
Ch. 3
VIII. Introduction to fractional reserve banking; money multiplier,
Federal Open Market Committee (FOMC) operations
Ch. 17, Lecture
PART II:
Financial Markets
Introduction to interest rates; the “natural rate” of interest, the Loanable
Funds market; government borrowing and “crowding out”
Lecture, Ch. 5
II. Forms of business enterprises; sole proprietorship, general and limited
Partnerships, corporations; debt and equity capitalization; Initial
Public Offerings (IPOs) and secondary markets
Ch. 2, Lecture
III. Portfolio vs. Foreign Direct Investment capital flows
Ch. 22
IV. Introduction to bond term structures and risk classifications; sovereign,
Government Sponsored Enterprises (GSEs), corporate bonds
Ch.6
V. Bond yield curves; entrepreneurship, time and ignorance
New York Times, Lecture
VI. LIBOR and variable rate debt instruments
VII.
Bond ratings, asymmetrical information, regulatory
capture theory
Ch. 2
VIII. Debt instrument cash flow analysis: “magic” of compound interest;
simple loan, future value, present value; coupon bond; relationship
between bond price and market interest rate
Ch. 4
IX. Marxian “fictitious capital” and relationship to crisis;
Mortgage-backed bonds as fictitious capital
Lecture
X. Fisher effects and negative interest rates; International
Fisher effects and capital flows
Ch. 4, Lecture
I.
PART III:
I.
II.
III.
IV.
V.
Banking and Bank Management
Difference in Balance Sheets between banks and other corporations
and rationale for bank regulation; timing mismatches and
deposit insurance
Ch. 10, Lecture
Sources and uses of funds, liquidity and liability management
Ch. 11
Risk management: default risk, systemic (policy) risk, risk
risk premia;
Ch. 10
Trade-offs between profits and capital adequacy; earnings
Multiplier and leverage ratio
Ch. 10
Liquidity management (cont.): borrowing at federal funds rate;
management of investments; borrowing at discount rate;
loan management
Ch. 10
PART IV:
Central Banking and Monetary Policy
Historical development of US banking system; “dual banking
System”, national and state banks
Ch. 12, [Smith 1990],
Fed Explained youtube
II. Origination of Federal Reserve System; changes under
Great Depression and Great Recession
Ch. 12, Lecture, Selgin youtube
I.
Money and Banking - 2
III. “Systemic risk”, Basel Standards & mortgage-backed
bonds revisited; “too big too fail”
IV. Classical lendor of last resort theory vs. modern central
banking
V. Relationship between Keynesian fiscal policy, central
banking monetary policy and the business cycle
VI. Philips curve: price stability, the business cycle
and unemployment
VII.
Dual vs. single mandate central banking
VIII. Monetary policy tools I; Money supply, Federal
Open Market Committee (FOMC) operations, reserve
ratio, “pushing on a string”, Quantitative Easing
IX. Monetary policy tools II; Fed Balance Sheet, discount
loans/discount rate and monetary base
X. Monetary policy tools III; Fed funds rate and relationship
to interest paid on reserves
Ch. 11 & 18, Lecture
Lecture, [Bagehot 1873]
Ch. 16, Lecture
Ch. 19, Lecture
Ch. 16, Lecture
Ch. 16 & 18, youtube
Ch. 17 &18
Ch. 17 & 18
PART V:
Theories of Money and Crises
I. History of financial crises
II. Financial innovation, subprime bonds and moral hazard
III. Austrian capital theory, time structures of production,
entrepreneurial decision-making, interest-rates
and risk premia
Economist 2014
Ch. 9
Lecture, Higgs youtube
[Prychitko 2010]
Recommended Textbook:
Frederic Mishkin (any edition). The Economics of Money, Banking and Financial Markets, by
Mishkin. Pearson Addison-Wesley. Note that purchase of the textbook is not required, there is a
copy on reserve in the campus library.
In addition, students should stay current on topical financial events through reading The
Economist magazine, the New York Times (especially the business section which is highly
recommended), the Financial Times and/or the Wall Street Journal either in print or on-line
versions.
References:
"The slumps that shaped modern finance", Economist magazine, April 2014, see link on
Professor’s website.
The following texts are optional reading for students seeking further knowledge of the
subjects discussed and referenced in class.
Walter Bagehot (1873). Lombard Street: A Description of the Money Market.
http://www.gutenberg.org/ebooks/4359
Money and Banking - 3
Friedrich Hayek (1990). Denationalisation of Money: The Argument Refined
https://mises.org/document/3970/Denationalisation-of-Money-The-Argument-Refined
D.I. Prychitko (2010). Competing explanations of the Minsky moment: The financial
instability hypothesis in light of Austrian theory”, see link on Professor’s website.
George A. Selgin (1988). The Theory of Free Banking: Money Supply under Competitive
Note Issue.
[http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=
2307&Itemid=27]
Vera Smith (1990) [1936]. The Rationale of Central Banking and the Free Banking
Alternative. http://www.econlib.org/library/LFBooks/SmithV/smvRCB.html
Youtube videos as references:
George Selgin, A Century of Failure: Why It's Time to Consider Replacing the Fed
http://www.youtube.com/watch?v=yLynuQebyUM
The Federal Reserve Explained http://www.youtube.com/watch?v=Oe0fGXzKb1o
Quantitative Easing Explained http://www.youtube.com/watch?v=PTUY16CkS-k
Quantitative Easing Revisited http://www.youtube.com/watch?v=oGIvw7T0GPI
Robert Higgs, Regime Uncertainty Then and Now
http://www.youtube.com/watch?v=f73izHRGI1A
Keynes vs. Hayek, Fear the Boom and Bust,
http://www.youtube.com/watch?v=d0nERTFo-Sk
Keynes vs. Hayek, Fight of the Century,
http://www.youtube.com/watch?v=GTQnarzmTOc
The Real Reason Quaddafi was killed, http://www.youtube.com/watch?v=6O8vM06EEE
Websites:
The Fed’s report on current levels of M1 and M2 (the Federal Reserve reports money
supply data at 4:30 p.m. every Thursday): http://www.federalreserve.gov/releases/h6/Current/
To access the Federal Reserve’s money museum:
www.rich.frb.org/research/econed/museum/
Money and Banking - 4
Information on key interest rates: http://www.bloomberg.com/markets/rates/index.html
The financial calculator for computing the current price of a discount bond:
http://www.publicdebt.treas.gov/sav/savcalc.htm
Historical information about inflation: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
To compute what goods would have cost at some point in the past after adjusting for
inflation: http://mortgages.interest.com/content/calculators/index.asp
To find the number of bank failure in the U.S., despite the regulations that protect banks
from failure. (Select the tab labeled “Bank and Thrift Failures): http://www2.fdic.gov/hsob/
To view information on bank regulation: http://www.ny.frb.org/banking/regulations.html
To find general information about the Federal Reserve System:
http://www.federalreserve.gov/general.htm
To find specific information on the FOMC, its schedule of meetings, statements, minutes,
transcripts, members, and the “beige book”: http://www.federalreserve.gov/fomc/
To read the most recent annual report of the Federal Reserve:
http://www.federalreserve.gov/boarddocs/rptcongress/
To review what the Federal Reserve reports as its primary purposes and functions:
http://www.federalreserve.gov/pf/pf.htm
Grading Policy:
Grade Breakdown
Supply & Demand Quiz
Midterm Exam
Group Project
Class Participation
Final Exam
Total:
100%
10%
20%
20%
15%
35%
Final
A
AB+
B
BC+
C
CD
F
Description
Superior
Excellent
Accomplished
Very Good
Good
Above Average
Average
Below Average
Poor
Failing
Percent Conversion
95% - 100%
90% - 94%
87% - 89%
83% - 86%
80% - 82%
75% - 79%
70% - 74%
65% - 69%
60% - 64%
Less than 60%
Money and Banking - 5
Note




Both the exams and the quiz will be as scheduled. There will be no “make-up”
tests. If there is documented medical or family emergency we will re-weight the
grading protocol.
Class participation includes class attendance as well as active participation in
class Q/As and discussion on current events.
The only “extra credit” for an “extra work” that may be considered is to prepare a
one page report after attending one of the events organized by the Economics
Society at SFC. The report should be exclusively on the guest speaker’s lecture
and should be analytical. Depending on the quality of submitted report, the “extra
credit” could add up to 5% to the final grade percentage.
There will be no recording of class sessions. Photographs of lecture materials is
allowed, but only with advanced permission.
Announcement
If you have a documented disability requiring accommodation in this class, please see
me at office hours or by appointments. Thank you.
Class Calendar
First day of class: September 3, 2014
Last day to drop/add without transcription notification: September 9
Last day for pass/fail transcript option: October 1
Quiz on Supply and Demand in the Loanable Funds Market (last 30 minutes of
class), and, last day for voluntary group project sign-up: October 8
Final group assignments and Midterm Exam (last half of class): October 15
In-class review of Midterm exam: October 22
Midterm grades posted due-date: October 24
Last day to drop the class, with a “W” on transcript: November 5
Group presentations: November 19 and December 3
Thanksgiving break, no class: November 26
Extra-credit due: December 3
Final Exam: December 10
Final grades posted due-date: December 19
Money and Banking - 6