Presentation Transcript

1. Banking and Money(chs. 11-12-15)

   Notebook and Test – Friday, May 9
2. Originally, there were barter economies – people traded for what they couldn’t obtain on their own. Money is a medium of exchange, a measure of value, and a store of value. The first money was commodity money – a specific good that was used as the standard for trade. Commodity money was replaced by fiat money – government issued money. Accepted because government guaranteed them. Fiat money comes in two types – currency (paper) and specie (coins). Money must be 1) portable, 2) durable, 3)divisible, and 4) limited in its availability. Evolution of Money
3. There have been several monetary standards in US History. Privately issued bank notes caused problems because they were not guaranteed by all banks. States initially had the power to issue currency, but… Too many types Too many different exchange rates Made interstate commerce difficult Constitution gives only CONGRESS the ability to mint money Secure– gives money value Adds uniformity Controls supply to control inflation and counterfeiting. Though it is has been backed by different standards in the past (greenbacks, gold, etc.) US Money is an inconvertible fiat money standard Keeps value Money supply is tightly controlled by the Federal Reserve, the nation’s central bank (Treasury is NOT a bank) Early Banking
4. Dramatic banking expansion between 1880 & 1921 causes most banks to be moderately stable. Too much investment in stocks Too much credit issued After the 10/29/1929 crash, banks did not have enough money on hand to meet demands of depositors – many closed and millions lost savings. The Bank Holiday – 3/5/1933 – every national bank was closed by Federal order until not permitted to reopen until it was proven sound Federal Banking Act (1933) – created the Federal Deposit Insurance Company (FDIC) to protect individuals in the invent of bank failure Individuals insured up to $100,000 Monitors banking practices to ensure fairness to consumers The Depression & It’s Changes
5. Commercial Banks cater to the interest of business & industry Savings Banks – banks that do not offer demand deposit accounts (DDAs) – accounts whose funds can be withdrawn without institutional approval Insurance & Securities Banks (NW Mutual, Prudential, Metropolitan [MetLife], etc.) Savings and Loans Banks – invest in mortgages and personal loans Credit Union – non profit financial institution that is owned by its members General offered by large employers as a benefit; can absorb clerical costs Four Types of Banks
6. 1. TO HELP PEOPLE CREATE CAPITAL THROUGH INVESTMENT Give individuals and businesses loans Promote savings for economic growth Savings – the dollars that become available when people abstain from purchasing 2. TO HELP CONSUMERS CREATED FINANCIAL ASSETS THROUGH SAVING Consumers can save in two main ways: Open a savings account Purchase certificates of deposit (CDs) Depositor loans savings to a financial institution at a high interest rate for a specified amount of time The Functions of Financial Systems
7. Finance Companies Loans money to make large purchases such as homes, automobiles, etc. Ex. If you buy a car, the finance company pays the dealership, you pay the finance company. Life Insurance Companies Collects premiums for policies that mature and are payable upon death of policy holder Pension Funds Long term savings plan that employees contribute into for retirement Mutual Funds Company that invests in multiple stocks, then sells stock in itself Real Estate Investment Trusts Companies that lend money to builders and developers Non Bank Financial Institutions
8. What is the risk versus the return (how much are you going to get back, and what is likelihood you will get it back)? What are your goals, short term and long term? Do you understand the investment? Can you invest consistently? Should you invest?
9. 401(K) Plans Retirement that both an individual and employer contribute Individual Retirement Funds (IRAs) Retirement that the individual pays Bonds Investments with a fixed interest rate that pay a guaranteed amount on maturity. Corporate Bonds Issued by businesses to generate revenue – investment for share of profit Municipal Bonds Issued by state and local governments to generate revenue Government Savings Bonds Issued by the federal government Treasury Notes/Bills Short term bonds issued by federal government – cost a lot, but high interest yield. Certificates of Deposit Investor lends money to a bank for a specific amount of time for a high interest yield – can not withdraw until contract is up. Types of Investments
10. Capital Market Money is loaned for more than a year (bonds) Money Market Money is loaned for less than a year (CDs, Treasury Bills) Primary Market Non-transferrable investments such as IRAs and Government Savings Bonds – you can’t sell them Secondary Market Corporate stocks Financial Markets
11. Equities are shares in companies (stocks). Bargains are hard to find (Efficient Market Hypothesis) because companies only want to sell at price that guarantees maximum profit. Portfolio Diversification – different types of stocks; some go up while others go down – keeps profit consistent Purchase through Security Exchanges like the New York Stock Exchange (oldest, largest, most prestigious in US), American Stock Exchange (AMEX), regional exchanges, and global exchanges. Over the counter markets have become popular in the virtual age (Ameritrade, NASDAQ) Equities (a/k/a Stocks)
12. Dow Jones Industrial Average – average of stock prices, increasing averages indict good economic performance, low indicts poor. Use the closing prices of 30 highest performing stocks Standard & Poor 500 – averages all stocks on NYSE, AMEX, and OTCM. Bull Market – term used to describe a strong market showing continually rising stocks and profits. Bear Market – term used to describe a “mean” market showing constantly dropping stocks prices and profits. Obviously, most important measure is individual portfolio performance – whether or not you are making, or losing, money. Measuring Stock Performance
13. Spot markets – trades are made at current prices Futures Contracts – agreements to buy a predetermined price on a specific date (bought on futures markets) Not always safe, can loose money if current price is lower than agreed up on price Options Markets Like futures, agree on a specific price at a specific date, but unlike future, they give both parties an option to opt out if the deal isn’t beneficial to them Call option – the right to buy Put option – the right to sell Future Trading Trends
14. The Federal Reserve was established in 1913. Its functions: Provides financial services for government Regulates banking industry – must approve mergers Maintains the payment system Enforces consumer protection Controls monetary flow through Bureau of the Mint Establishes interest rate guidelines. Conducts monetary policy The Treasury writes checks off of Fed-mainted accounts, such as the IRS and Social Security accounts. The Federal Reserve
15. It is privately owns by its member banks, NOT the US government. It is a corporation that sells stock in itself. National banks (charted by US) MUST belong, state banks have choice. It is run by a 7 – member board of Governors headed by a chairman (current Chairman is Janet Yellman) appointed by the President and approved by the Senate – Serve 14 year terms. They along with 5 presidents of District Federal Reserve Banks serve on the Federal Open Market Committee and decide US monetary policy, and advise government on debt and credit. There are 12 district banks regionally placed to serve the members banks: make loans to member banks, store money. Structure of the ‘Fed’
16. Board of Governors are directly advised by the: Federal Advisory Council Monitors health of the economy Consumer Advisory Council Decides consumer credit laws Thrift Institutions Advisory Council Regulates issues concerning savings and loan companies Structure of the ‘Fed’ con’t.