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