money its origin: –barter didn’t work, so money became a store of value. we all agree on the...
TRANSCRIPT
Money• Its origin:
– Barter didn’t work, so money became a store of value.
• We all agree on the rules of the game (like monopoly), so we ‘buy in’ to the idea that a seemingly worthless piece of paper will have a certain value.
– The first type of money was specie money. It had actual value as a precious metal – probably gold.
– Then, government put their stamp on the money, being able to control how much of it was out there. This type of money is called fiat money
Inconvertible fiat money
• The U.S. dollar is inconvertible (can’t convert your money to a precious metal at a fed. reserve bank).
• So why does our currency have value?
What are some characteristics of an efficient money?
• It should be– Divisible– Portable– Durable
• How does our currency measure up?
How do banks make money?
• They use depositors’ money to loan to others (plus interest, of course)– Car loans, house, business, credit cards…
What if all of their money is loaned out?
• They borrow money from the Federal Reserve Bank – the ‘Central Bank’ of the United States.
The Federal Reserve must constantly choose between two evils:
• Inflation and Recession– By adding to the money supply, it attempts to
incentivize spending / borrowing • (expansion)
– By holding back the money supply, it attempts to de-incentivize spending / borrowing
• (contraction)
~How does it do this? Let’s see:
Interest Rates
• Discount Rate = the percentage rate the FED offers its member banks (currently 0.75%)– By lowering the %, the FED encourages
borrowing (loose money policy)• This sometimes leads to inflation
– By raising the %, the FED discourages borrowing (tight money policy)
• This stagnates spending/borrowing and can cause recession
• Prime Rate = the percentage rate banks offer their best customers (currently 3.25%)– Banks offer “Prime +” to most of their customers
• Mortgage loans = 5.5 – 7.5%• Car loans = 6 – 9%• Credit Cards = 12 – 29%
– If there is collateral involved, the % will be lower– Also involves your credit rating / FICO score,
earnings, and ‘character’.» Let’s look at your worksheet to see how you
measure up
Interest Rates (cont.)
Will the bank lend $ to me?• Do you have a job?
– If you can prove that you have consistent income which would allow you to make payments on a loan, then generally, yes…they will loan you money. But it’s a big risk for them, so it all depends on how much you need and for what!
• If you need the money for something that retains value (durable good), then they are more apt to say yes b/c they can take it from you and sell it if you stop paying.
• If you need it for a $200 pair of jeans, a weekend trip to Cabo, and a plane ticket, then…not so much.
Will the bank lend $ to me?
• Do you have collateral?– If you have “assets” (cash in the bank, stocks,
a car, house, a gold bar buried in the yard), then the bank is more confident that you’ll be able to pay back the loan, even if you lose your job.
• (or you could go and pawn your collateral goods on ‘Pawn Stars’)
Will the bank lend $ to me?
• Do you have a good credit history?– Your FICO score is like
your reputation…once it is tarnished, it’s hard to repair.
– If you make payments on-time, don’t “max out” your credit card, don’t open too many credit cards, your credit score will go up.
• Excellent Credit (750+)• Good Credit (700-749)• Fair Credit (650-699)• Poor Credit (600-649)
• Bad Credit (Below 599)• No Credit/Limited Credit
Other ways the Fed. tries to manipulate the financial system:
Reserve Requirement:• Banks use your money to make money, but…• Banks must keep a certain percentage of their
depositors’ money “in the vault”. (currently 10%)– By limiting the amount of money banks can use to
invest (raising the reserve req.) , the FED basically restricts the money supply, causing the econ. to slow.
– By lowering the reserve requirement, the FED is allowing the money supply to increase, causing the economy to expand.
Open Market Operations
• The Fed. Sells Treasury Bonds (and other federal securities) = pulling money out of circulation (fights inflation)
• The Fed. Buys Treasury Bonds = putting money into circulation (spurs inflation)
Moral Suasion
• Press releases, announcements, testimony by Fed. Chairperson that may influence banking policies.– Ex: Fed. Announces that inflation is on the
rise and it may raise interest rates. This would cause banks to restrict loans or be more cautious.
What else does the FED do?
• Enforce consumer legislation
• Clear checks
• Maintain currency and coins
Monetary Policy Review:
How does the Gov/Treasury Dept. and the Federal Reserve
incentivize and/or inhibit inflation?
In other words, how do they react to indicators in order to stabilize the
financial system?
~See Worksheet~