FILE: 252N10.HTML

CLASS NOTES FOR ECONOMICS 252/ FALL 2005

DR. WILLIAM SHINGLETON

 

THE FEDERAL RESERVE                                  CH 14

 

REVIEW MONEY CREATION FROM LAST WEEK

 

          COST OF BANK ROBBERY

                   MOST BANKS CARRY IT AS AN EXPENSE LINE ALONG WITH FORGERIES

                   USUALLY CARRY INSURANCE WITH A HIGH DEDUCTABLE

 

          RESERVE REQUIREMENT

                   RESERVE ASSET

                   NON-RESERVE ASSET

 

          LOAN CREATION CAPACITY

          MONEY CREATION CAPACITY

          REQUIREMENTS

                   EXCESS RESERVES

                   WILLING LENDER

                   WILLING BORROWER

                   NO FED CONTROL

 

 

          MONEY CREATION LIMITED TO EXCESS RESERVES

 

                   ***********************************

                   *        MONEY CREATION CAPACITY    *

                   *                                                                 *

                   *        = EXCESS RESERVES                    *

                   *                                                                 *

                   *        = LOAN CREATION CAPACITY   *

                   *                                                                 *

                             ***********************************

 

 

BANK PROFIT IS EARNED ON THE MARGIN BETWEEN

          COST OF FUNDS AND INTEREST RATE CHARGED TO CUSTOMERS

          PRIME RATE 5.50 17 MAR 2005

 

 

ROLE OF FEDERAL FUNDS MARKET

          COVERING YOUR BALANCE SHEET

                    OVER EXTENDED BANK

                    DEALING WITH A RESERVE SHORTAGE

                    FEDERAL FUNDS MARKET

 

          FEDERAL FUNDS MARKET/31 NOV 2005

                    3.75 PCT TARGET SINCE SEP 2005

          91-DAY T BILLS  3.79

          RATE DETERMINATION

          SUPPLY

          DEMAND

          PORTFOLIO MANAGEMENT

          EFFECT OF OPEN MARKET PURCHASE

          EFFECT OF OPEN MARKET SALE

 

 

ORIGINS OF THE FEDERAL RESERVE/MONETARY HISTORY OF UNITED STATES

 

          FIRST BANK OF THE UNITED STATES 1791-1811

                   HAMILTON (THE CREATOR) VS JEFFERSON AND MADISON

                   REGIONAL CONFLICT

                             FEDERALISTS VS ANTIFEDERALISTS

                                      AS IN THE FIGHT OVER THE CONSTITUTION

                                      MISTRUST OF CENTRALIZED POWER

                             AGRICULTURE VS FINANCE VS BUSINESS

                             A NATIONAL BANK MONOPOLY

                                      BRANCHES ACROSS STATE LINES

                                      OPPOSED BY STATE BANKS

                                                PROTECTING LOCAL MONOPOLIES

                                      FEDERAL GOVERNMENT OWNED 20%

                   RECHARTER FAILED IN 1811

                             MADISON HAD CHANGED HIS MIND

                             FAILED BY ONE VOTE IN EACH HOUSE

 

          SECOND BANK OF THE UNITED STATES 1816-1836

                   MORE REGIONAL CONFLICT

                             FEDERALISTS VS ANTIFEDERALISTS

                                      AS IN THE FIGHT OVER THE CONSTITUTION

                                      MISTRUST OF CENTRALIZED POWER

                             AGRICULTURE VS FINANCE VS BUSINESS

                             ANOTHER NATIONAL BANK MONOPOLY

                                      BRANCHES ACROSS STATE LINES

                                      OPPOSED BY STATE BANKS

                                                PROTECTING LOCAL MONOPOLIES

                                      FEDERAL GOVERNMENT OWNED 20%

                   SUPPORTED BY MADISON

                             IN THE LAST YEAR OF HIS ADMINISTRATION

                   HENRY CLAY HELPED

                   RECHARTER FAILED IN 1836 ON JACKSON'S VETO

                             BANK HELD ONE THIRD OF ALL BANKING ASSETS

                             BIDDLE VS JACKSON

                             LED TO FREE BANKING AT STATE LEVEL

                                      STATES DROPPED MOST BARRIERS TO ENTRY

                                      STATES TRIED TO AVOID LOCAL MONOPOLIES

 

          REVERTED TO LOCAL MONEY AND ONE-SIDED BANK NOTES

                   REPRESENTATIVE FULL BODIED MONEY

                   5000/7000 MAY HAVE BEEN COUNTERFEIT

 

CIVIL WAR GREENBACKS

          GRESHAM'S LAW

          BALLAD OF SPENCER CLARK WSJ 2-25-85

          GREENBACKS FINALLY REDEEMED IN GOLD IN 1879

 

FREE SILVER MOVEMENT

          AGRICULTURE VS FINANCE VS BUSINESS, AGAIN

          CRIME OF 1873- NO MORE SILVER COINAGE

          SILVER ACT 1890-1893

          INFLATION AND REPEAL BECAUSE OF THE PANIC OF 1893

          CROSS OF GOLD: WILLIAM JENNINGS BRYAN 1896

 

PANIC OF 1907 IMPORTANT

          PYRAMID BANKING

                   RESERVE ASSETS

                   BANK RUN

                   BANK FAILURE

                   CALL LOAN

 

FEDERAL RESERVE ACT OF 1913 IMPORTANT

          THE SAME DEBATE AGAIN

          PUT TOGETHER BY A COMMITTEE

          HOPED FOR STABILITY FOR FINANCIAL SECTOR

          LIMITED CALL LOANS FOR BUSINESS STABILITY

          ONLY EMERGENCY LOANS TO GOVERNMENT

 

          ELASTICITY OF CURRENCY...REAL BILLS DOCTRINE

          INDEPENDENCE OF DISTRICT BANKS

 

          12 FEDERAL RESERVE DISTRICTS

                   CHICAGO FOR US

                   THE CIRCLE ON THE DOLLAR

 

 

PRESIDENT WILSON ADDED BOARD OF GOVERNORS

          7 MEMBERS

          BUSINESS-BANKINGS-FARMING

          NO WOMEN UNTIL CARTER

          ONLY ABOUT $140,000 PER YEAR

          STAGGERED 14 YEAR TERMS

 

 

OPEN MARKET COMMITTEE (FOMC)

          HAS ACTUAL AUTHORITY TO SET POLICY

 

          FOMC/MEETS EVERY 6 TO 8 WEEKS

 

          COMPOSITION

                   7 MEMBERS OF THE BOARD
                   PRESIDENT OF FRB NEW YORK

                   OTHER PRESIDENTS ON A ROTATING BASIS

 

          SETS MONETARY TARGETS

                    USES OLD DATA:  LOOK AT THE DATES

                    NEVER KNOWS CURRENT MONEY SUPPLY

                    NEVER KNOWS HOW MUCH IS NEEEDED TO HIT TARGET

                    TRADES EACH DAY

 

                   CURRENT TARGET IS FEDERAL FUNDS RATE (FFR)

                             FFR IS RATE ON INTERBANK LOANS

                             FED DOES NOT PARTICIPATE IN THE MARKET

                             GOVERNMENT DOES NOT PARTICIPATE IN THE MARKET

 

                             FFR VS T-BILLS/PORTFOLIO BALANCING

 

 

OBJECTIVES OF MONETARY POLICY

          ONLY EMERGENCY LOANS TO THE TREASURY

          NATURAL RATE OF OUTPUT

          NATURAL RATE OF UNEMPLOYMENT

          NO INFLATION

          NO DEFLATION

          EXCHANGE RATE MANAGEMENT

 

 

 

USE TOOLS TO MEET OBJECTIVES

 

TOOLS OF MONETARY POLICY

          RESERVE REQUIREMENT

                   1936 AND 1937 RAISED BECAUSE OF EXCESS RESERVES

          DISCOUNT RATE

                   POLICY CHANGED JAN 2003, NOW SET BY MARKET 0.5 ABOVE FFR

          OPEN MARKET OPERATIONS

                   PRIMARY TOOL

                   TARGET ON FFR

                   T-BILLS

          ROLE OF PRIMARY DEALERS

                   22 PRIMARY DEALERS IN MAR04

                             5 OR 10 HANDLE MOST OF THE BUSINESS

                             MANY PENSION FUNDS WILL TRADE ONLY WITH

 

                   REVIEW BOND (T-BILL) MARKET

                             ONLY SHORT-TERM BILLS

                             FACE VALUE

                             MATURITY DATE

                             MARKET PRICE

                             INTEREST RATE

                   "FED TIME"

 

 

          ONLY ONE TOOL, TOO MANY OBJECTIVES



          PROFITS:  WHAT DO THEY DO WITH ALL THEIR MONEY?

                   24 B/2005

                   32B IN 2000 BUT ONLY 19 B IN 1997

 

 

 

RESERVE REQUIREMENTS

          FIRST RESERVE REQUIREMENTS...VIRGINIA 1837

 

          TABLE 14.1  RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS

                    LATEST ADJUSTMENTS:  2004DEC23/ NEXT ADJ DEC 2005

                    PRESS RELEASE/FEDERAL RESERVE BOARD

                   http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1

 

TOTAL DEPOSITS                 REQUIRED‑RESERVE RATIO

 

CHECKING**                         MARGINAL REQUIRED RESERVE RATIO

0.0- 7.0 MILLION                    0%

7.0-47.6 MILLION                   3%

       OVER 47.6                       10%

 

NONPERSONAL TIME AND SAVING (MEASURED FROM DATE OF ISSUE)

          LESS THAN 18 MOS TO MATURITY       0%/SINCE 1990

          MORE THAN 18 MOS TO MATURITY     0%/SINCE 1990

 

          EUROCURRENCY                                     0%/SINCE 1990

 


NOTES FOR FED TABLE

** INCLUDES ALL DD TYPE ACCOUNTS EXCEPT THOSE LIMITED TO 6 TRANSACTIONS PER MONTH “1. Total transaction accounts consists of demand deposits, automatic transfer service (ATS) accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances, and obligations issued by affiliates maturing in seven days or less. Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection. For a more detailed description of these deposit types, see Form FR 2900 at http://www.federalreserve.gov/boarddocs/reportforms/

 

GOVERNED BY FEDERAL RESERVE REGULATION D

MONETARY CONTROL ACT OF 1980 APPLIED RESERVE REQUIREMENTS TO

          ALL U.S. DEPOSITORY INSTITUTIONS “Reserve requirements are imposed on commercial banks, savings banks, savings and loan associations, credit unions, U.S. branches and agencies of foreign banks, Edge corporations, and agreement corporations.”

 

          MOST LARGE CD REQUIREMENTS WERE ELIMINATED 12-4-90

          SOURCE: FEDERAL RESERVE BULLETIN JULY 1994

          RATIOS ESTABLISHED BY THE MONETARY CONTROL ACT OF

          1980. 

          DD LIMITS MODIFIED ANNUALLY BY 80% INCREASE IN DD

          HELD BY ALL INSTITUTIONS AS OF JUNE 30 EACH YEAR