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Money, Banking, and the Fed
How does money affect
economic activity?
U.S. Currency or “money”
Monday 1/3:
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NOTES
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3 functions of money
6 characteristics of money
3 types of money
Circular flow diagram spending/savings
Fractional reserve banking
VIDEO: Credit Crisis Visualized
What is “money”?
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Medium of exchange ~
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Store of value ~
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Unit of accounting or Standard of value ~
Characteristics of money
Durability
Portability
Divisibility
Uniformity
Stability
Scarcity
Three types of money
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Commodity money
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Representative money
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Money that also has value as a good
(commodity).
Money that can converted into gold or silver.
Fiat money
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Money that has value because the
government says so. Legal tender
Circular Flow of Mixed Economy
Circular Flow of Mixed Economy
Households
Businesses
BANKS
Fractional
Reserve Banking
Federal Reserve
Video: Eye of the Storm
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Structure of the Federal Reserve System
Functions of the Federal Reserve Bank
Explain the important role the “Fed”
(Federal Reserve System) plays in our
economy.
The Federal Reserve System
The Federal Reserve System
3. Number of districts?
12 districts
4. NR is part of which district?
9th district
5. Selection process of Board of Governors.
Appointed by President, confirmed by Senate for
14 year term.
6. Name current Chairman of Board of Governors
Ben Bernanke
Functions of the Federal Reserve System
7. Bank for banks
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Provide money when needed
Clear checks, replace currency, verify currency
8. Supervision & Regulation of banks
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Regulation; make laws for financial institutions
Supervision; enforce laws for financial institutions
9. Conduct monetary policy
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Federal Reserve ability to change the amount of
money in circulation (money supply or MS)
MS changes  change in interest rates
In Plain English
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Watch Buck to get a virtual tour of the
Federal Reserve system.
FOMC
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Sets monetary policy
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Adjusts money supply which impacts interest
rates and influences spending in the
economy.
Federal Reserve changes MS
Ms
Interest
Rate
i1
Md
Q of M
Credit Crisis Visualized
1.
2.
3.
4.
5.
6.
7.
Define leverage.
Define CDO.(collaterized debt obligation)
Explain credit default swaps.
What role did the rating system play in the
crisis?
Define subprime mortgage.
How did CDOs become riskier?
Define “underwater”.
Credit Crisis Visualized
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What happened?
How did the Federal
Reserve play a role in
the crisis?
At 1%, how long
would it take to
double investment?
What lessons did you
learn?
Frontline: the warning…
Warning signs ignored, blame on both sides…
What can be done to prevent another financial
crisis?
Alan Greenspan, Larry Summers, Robert Rubin
http://www.pbs.org/wgbh/pages/frontline/warning/cron/
1987 Reagan appoints Alan Greenspan; free
market, de-regulation philosophy
Jan. 1993 Clinton economic team continues path
Feb. 1994 Major derivatives scandal
May 1998 One Regulator Is Closely Eyeing Derivatives
Sept. 1998 A Meltdown Begins at Long-Term Capital Management
Dec. 1998 No to Born; No to Regulation
1999 Banking Laws Are Changed; Repeal Glass-Steagall
Mar. 2000 Tech Bubble Bursts in Late '90s
2001-2006 Housing prices can only go up
Ben Bernanke Chairman of the
Federal Reserve, controls money
supply & regulates banks.
Bank
Main
function
Risk
Liquidity
Return
Regulation
Henry (Hank) Paulson Secretary of
Treasury, oversees economy and
advises President.
Investment
Bank
Accept deposits/give
out loans
Sell securities
Stock, bonds, mutual
funds
All accounts insured
up to $250,000 (FDIC)
No guarantee, can lose
all money invested
Federal Reserve can
make funds available
in times of crisis
No access to funds,
have to sell securities
or secure lines of credit
Low rate of return
Potential high rate of
return
Supervised by Federal
Reserve, restrictions on
leverage
Undefined supervision
or restrictions on
leverage
Inside the Meltdown
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Timeline of the crisis
Key players in crisis
Understanding of
what happened
What can be done to
prevent another
financial crisis
Inflation
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Prices rising
throughout the
economy.
Purchasing power is
the ability of money to
buy goods & services.
When inflation rises,
purchasing power
falls.
Consumer Price Index
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The CPI is a
measurement of
changes in price level
over time.
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CPI in Nov. 2009 =
216.17
Inflation impacts people differently….
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Savers 
People on fixed income 
Businesses firms 
People who owe money 
People who lend money 
Overall, inflation is bad because
people pay more for the same
stuff.
Video: Power of Money
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Historical look at the role the Federal
Reserve took in stabilizing the economy.
1979-1984 economic turmoil
Inflation + Stagnant GDP = Stagflation
The “Lost” Decade