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.us Fall 1998: Money and Banking: Akacem

Important Note

r http://stripe.Colora90 J:DU/-meaf/f984111/syllabus/Welcome.htrn

Professor: M. Akacem MONEY AND BANKING

ECONOMICS 4111-01 OFFICE: ECON 4-C

OFFICE HOURS: M-W , 9:00 to 9:55 am Class Time: 10:00 to 10:50:

Phone: 492-3827

Attendance

Internet amt World Wid,e Web use

1. IMPORTANT NOTE: please read the syllabus carefully. A number of the questions that you may have about the course are answered in it. It also provides you with a good guide to the progress of the course as well as the chapter assignments, tentative exam dates etc ... To make the syllabus user friendly, the semester is broken into weeks, each with a topic, chapter number(s) and page. You will also find other relevant information on exams, grading and guest lectures.

2. OBJECTIVE OF THE COURSE:

The main objective of this Money and Banking course is to teach you the fundamentals but then go far beyond them by applying the theory to what is taking place in the U.S. and overseas. The assigned text is your standard source for most of the material covered in class, but sometimes lectures will go beyond the text. You are expected to be prepared for each lecture by reading ahead of time. We will try to apply what we know and use a lot of examples from current financial and banking developments in the U.S. and other countries such as the Asian Currency turmoil. Toward this end, reading The Wall Street ,Journal is extremely important. Do not wait for me to assign an article. You need to read it on a daily basis. I will often start a class discussion around an article published in The Wall Street ,Journal. I will try to keep you informed as to which articles I think are relevant to our class discussion throughout the semester.

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Overall, the course will cover the relevant issues in the money and banking field, with an emphasis on institutions, policy and markets. The course assumes that you are already well versed in Macroeconomics. However, this course is not meant to be a re-hash of upper division Macroeconomics. Check the pre-requisites for taking this course. Part of the course will be spent discussing banking regulation and its impact on the banking industry. Should we continue to separate banks from commerce ? Did we learn something from the Banking and Savings and Loans crisis ? What are the policy implications for the U.S.' Financial system. The course will also examine the proposals of Market Value Accounting for financial institutions. We will also discuss the U.S. treasury's proposal to reform the U.S. banking system and the likely impact the reforms will have on the U.S. financial system. Should Deposit Insurance be scrapped for example? We will also be

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discussing the role of monetary policy, and that of the Federal Reserve and their impact on the U.S. banks and the economy in general. Finally, we will cover exchange rates and the Federal Reserve's role in the foreign currency market.

Towards the end of the semester and if time permits, we will try to cover topics on the European Monetary Union and the Asian Currency Crisis. Throughout the course, we will be referring and using not only the main text but also articles from the Congressional Research Service, the Board of Governors of the Federal Reserve and the other regional Federal Reserves. Finally, I highly encourage you to visit the different sites of the different Federal Reserve banks. You will be surprised at how much information you will find. It will complement the class lectures nicely with up to date information.

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3. GUEST LECTURES:

Finally, one unique and important aspect of this course is the use of outside speakers. One will be from the Federal Reserve Bank of Kansas City on Bank Examination by a bank examiner from the Examination Department. Attendance is MANDATORY and any material covered during these guest lectures is considered fair game for any or all of the exams.

Main Text: Money, the Financial System, and the Economy, Second Edition by R. Glenn Hubbard, Addison Wesley, 1997.

Book on Reserve: Banking Regulation, Its Purposes, Implementation, and Effects,By Kenneth Spong, 4Th Edition, Federal Reserve Bank of KansasCity, Chapters 1-4.

Other texts that are optional reading for the course: "Secrets of the Temple: How the Federal Reserve Runs the Country", by William Greider, Simon and Shuster, 1987 "American Finance for the 21st Century" by Robert E. Litan with Jonathan Rauch, The United States Department of the Treasury, November 17, 1997. "U.S. Monetary Policy and Financial Markets", by Ann-Marie Meulendyke, Federal Reserve Bank of New York, 1998 (Chapters 1,2,3,4,9 and 10). "Using The Wall Street Journal", Fifth Edition, by Michael Lehmann, Irwin 1996 (particularly chapters 4, 11 and 12). "Liar's Poker", Michael Lewis, Norton, 1989. "The Money Market", by Marcia Stigum, Dow Jones irwin 1990 or later editions, Chapter, 9 (The Most Watched Player, The Fed) "Instruments of The Money Market", by Timothy Cook and Robert LaRoche, ( chapters 1 to 3) Federal Reserve Bank of Richmond. "U.S. Monetary Policy: An Introduction", Federal Reserve Bank of San Francisco, 1995 (will be left on reserve). "Economics: A Guide for the Financial Markets", by Neil MacKinnon and Paula Neal, IPR books, 1992. "Stocks for the Long Run", by Jeremy Seigel, Irwin.

Material on Reserve at the Library:

I will have some articles from The Wall Street ,Journal on special topics and material from the Congressional Research Service, and the different regional Federal Reserve Banks as well as other

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published articles on banking at the Reserve library. Some of the material will be distributed in class, however. This material is in addition to the main text. I highly recommend you read it, PAR TI CULARL Y when it is assigned for the exams. I will let you know when and if any material is left on Reserve for you.

Back to the top: 4. READING OF THE WALL STREET JOURNAL IS A MUST:

Reading The Wall Street Journal on a daily basis is as valuable, if not more, than the text. I will pass the subscription forms in class. Articles from The Wall Street Journal that pertain to our class will be assigned throughout the semester. If you cannot afford a subscription to the Journal, you can always have access to it at the campus Library. Once you subscribe to The Wall Street Journal, you will have access to the Interactive Edition via the Internet. The whole journal will be accessed via the web with your special password. You will also get access to the following journals and magazines: Barrons', Smart Money, The Wall Street Journal Europe and The Wall Street Journal Asia (as of last spring, all these were accessible).

5. TENTATIVE COURSE OUTLINE:

Please understand that this somewhat tentative since we have outside speakers coming in. Their schedule will be finalized at the beginning of the semester once I check with them andfinalize a few dates. Please note the exams will be given ON AVERAGE every 4 to 5 weeks. You will be given ample notice in class so plan to be there.

--! l I Week One: Introduction: Chapters 1, 2 and 3 , OUTLINE NUMBER ONE I I -

1 ~ k Two: Chapters: 1, 2 an~ 3 Contin~ d, ~~INE NUMBER ONE (contim~ed) . I

Week Three: Finish OUTLINE NUMBER ONE and start on: The B·anking Industry ,Cliapters: l 1 and 2 from Kenneth Spong's book (On Reserve), Chaptcer: 14 and 15 from the main Text and ! part of 13, OUTLINE NUMBER TWO ··- -- .....;.:,. ____ .......... =··- - -··-- ... _ - .. . ~ ... _ = ~~

Week Four: The Banking Industry Continued: same as week Three, OUTLINE NUMBER TWO CONTINUED Optional: "Lessons for The Regu.Jation of financial Institutions" by Lawrence White, In. Dimitris Vittas et. ON RESERVE. - - - _.__ - -Week Five: Finish OUTLINE NUMBER TWO and. start on: The S & L crisis, Handout from I

I the Forbes Encyclopedia of Economics and review of Tapes. Time permitting, we may be able to see both of them. Expect one or two short questions from the case study. OUTLINE NUMBER THREE _j - - - - --- - ~ - - -I Week Six: The Federal Reserve System, Chapters 19, OUTLINE NUMBER FOUR __ ............... ..-.......,;.;.........,,..___ __

·- - -I Week Seven: M-0ney Creation, Chapters: 17, OUTLINE NUMBER FIVE

\Veek Eight: Chapters: 17 and material covered. in class Monetary Base and the Money Supply I

Model OUTLINE SIX I

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Week Nine: Monetary Base and Budget Deficits Monetary Policy Tools and the Federal Funds Market Chapt~r 18: pp. 466-477 and Chapter 20, OUTLINE NUMBER SEVEN

Week Ten: Goals and Tools of Monetary Policy, Targets and lnstruments, OUTLINE NUMBER EIGHT

Chapter 21,

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Week Eleven: Decline of Traditional Banking as We Know It: The End of Glass Steagall? Lecture material (and other if necessary), OUTLINE NUMBER NINE

Week Twelve: Emerging Market Debt, Debt Conversion and the External Sector, Chapters 22 starting on page 564 and Lecture Material, OUTLINE NUMBER 1-0 ·-- -- - -- -..,#,------ . -- -·~- ~-- --- -" - ~"' -~

Week Thirteen: Exchange Rates, Capital Flows and the Asian Currency, Th:e European M@netary Union, Chapters 8, 22 and Lecture Material. Check the home pag.e list,ed in Unit Fourteen on our class home pag,e. OUTLINE NUMBER ELEVEN

Week Fourteen: The Junk Bonds Market, Lecture Material, OUTLINE NUMBER TWELVE -~;(,.,.;;-= -....:·- -.·;;... - -- ·- -- "" -- --·· ~ --- --

Week Fifteen: Stock Market Crash of 1929 and 1987, Lecture Material. Time permitting, we may see a one hour video on The 1929 crash and if possi:ble another one on Dow Jones (1997), OUTLINE NUMBER THIRTEEN

Week Sixteen: The Asian Currency Crisis. Doubtful that we will have the time, but if we do, we

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will spend seme time on it and visit a special home page dedicated to it.

LAST DAY OF CLASSES IS DECEMBER 9th

Fi'Ral Exam Date: December 14th 11:39 am to 2:31 p.m

NO MAKE UP FINAL WILL BE GIVEN

NOTE: Posted on the class home page are all of the outlines. I suggest that you print all of the outlines from day one so that you have an idea of what we will be covering during the semester.

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You will have a total of three exams. The exams will be multiple choice (with a possible combination of true/false in some of them) as well as essay questions for one and possibly two exams. The last test will definitely have at least two essay questions. The exams will be given roughly every 4 to 5 weeks. The dates will be announced in class at least one week in advance. The lowest grade on one of the three exams will count for 25 % , the second best exam will count for 35 % , and the best exam will count for 40 %. The second exam will only cover the material studied between the first and second exam and any other assignment(s). The last exam will be more comprehensive. It will cover the last part in addition to some (NOT ALL) of the material previously covered. This will be communicated to you before the last test. On the Home Page for this class, you have access to 3 homework sets. The first homework set will help you prepare for the first test, the second homework set for the second etc ... I will try to also post a sample exam from the essay part on our class home page.

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. HOW DO I USE THE WEIGHTS TO GET MY OVERALL GRADE? Here is an example. Suppose you received a 70 in the first test, an 82 in the second test and an 87 in the last test. You can estimate your grade at any time (even before taking any tests by simply guessing what grade you "may" obtain in any one or all of the tests). Take 40 % of the highest grade, 35 % of the second highest and 25% of the lowest grade. In this case 40% of 87 is 34.8 (87 * .40), 35% of 82 is 28.7 (82 * .35) and 25% of 70 is 17.5 (70 * .25). You add all three numbers (34.8 + 28.7 + 17.5=81 which is a B.

As mentioned earlier, even if you do not have all the grades, you can still estimate your overall total. Let us say that you do not have the grade for the final, which is usually the case. Put in a grade that is close (just guess based on your performance), and you can estimate your overall total. You can also estimate what you need to have in any one of the tests to reach a given overall total.

7. THE STOCK MARKET GAME: I have used the Stock Market Game (SMG) for the first time last semester (spring 1998). A team from my class ( Denver) won first place for the Colorado region by making the most money. The prize was $100 for the team (it had two students so they split the prize). The names of the team were also published in the Denver Post with a paragraph that they wrote about their investment strategy.

The proper name of the game is: SMG2000 The home page is found at: http://www.smg2000.org

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e. WHAT IS THE STOCK MARKET GAME? The game is sponsored by The Denver Post. Each team will get a subscription to The Denver Post for the duration of the game (usually about 10 weeks). I t starts on October 5th and ends on December 11th. The team will get ONE copy of the paper. What I did last semester was to have the paper delivered to the team captain's address and have the team share it. The team captain can be any team member agreed to by the group. The captain does not do any more or less work than the others. It simply helps for me to communicate with one person from each team and follow the team's strategy. I will collect the E-mail addresses of all the team members so that I can send them periodic information on either interesting articles from the WSJ (Wall Street Journal) or simply to create a group list to make it easier to communicate about issues relating to the game.

SIZE OF EACH TEAM: An ideal size is 3 students per team but past teams had as many as 4 to 5 students. Given our large class, I think that 4 students per team is probably optimum. The stock market team can also turn into an exam review/study group for this class which has worked in the past. This is the ideal set up since it would create a working group for the whole semester for both class material as well as for playing the game.

COST OF THE GAME: The cost of playing the game is $5.00 per team split by the number of players. I will collect a check from each team and send all of them to The Denver Post. The Denver Post will send me the passwords and log in names and I will pass them to each team. Each member will have the password and log in name but I suggest that each team coordinates its investment strategy and buy and sell orders. We do not want to have members of the team buying and selling at different times without a coordinated strategy. It is best to do it as a group and discuss an investment strategy based on your knowledge, research, reading of the WSJ etc ... Remember, it is a TEAM effort. I would need the names, E-Mail addresses of each team with the name of the team captain underlined.

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WHAT WILL I DO? Each team will be given $100,000 of play money. However, you will be executing trades just line anyone on Wall Street at the going price that day. You will also be paying a commission that will be deducted from your $100,000 initial allocation. You can buy on margin and do most of the transactions undertaken in the world. This is as REAL AS IT GETS. You can buy and sell shares after (hopefully) you have done some home work. You may, if you wish, choose to test the Dart Board theory by picking stocks by throwing darts at the Stock market page from the WSJ. The Dart Board does beat the pro's on Wall Street once in a while. Or you may implement your own strategy based on what you learn in class, the Federal Reserve's strategy as well as your readings of the WSJ. This is the best way to learn about the stock market game without risking your own money.

8. ATTENDANCE: attendance is a must. I will be handing out a few articles in class and will not bring them to class more than once . If for any reason your are unable to attend class, make sure that you have a partner that would collect these handouts for you. Alternatively, you can come to my office for your copy(ies). However, if you must miss classes freguently, you are recommended to drop the class before the deadline.

9. EXAM DATES AND MISSED EXAMS: the mid-term exams dates will be announced in class at least one week in advance. There are NO MAKE UPS for missed exams a missed exam is an automatic "F". The only exception is for medical emergencies that are properly documented.

10. OFFICE HOURS: The office hours are there for you to use. Come by if you have any questions or simply to check on a few things. A void mail messages. I can only get to them during office hours anyway.

11. INTERNET AND WORLD WIDE WEB SOURCES:

Check my home page for this class. You will find plenty of sites that are relevant to what we do in class. I particularly want you to visit the various Federal Reserves' sites as well as the board of governors where you can read the minutes of the Federal Open Market Committee meetings as well as other reports on the state of the US economy.

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Important NotelObjective of the CourselGuest LectureslMain TextlMaterial on Reserve! The Wall Street .TournaIICourse OutlinelGradinglStock Market GamelAttendancel

Exam Dates and Missed ExamslOffice Hours Internet and World Wide Web use

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