Banking and Money in the Economy

The process of converting one currency to another, converting it again to a third currency and, finally, converting it back to the original currency within a short time span to gain a profit.

- repealed the Glass-Steagall by allowing ownership of banks by securities and insurance firms and allowed banks to participate in securities, insurance, and real-estate.

after world war 2 soviet union and eastern European countries used dollar for international trade, but they kept the money in European banks

requires U.S. companies that issue debt or equity to maintain internal accounting controls and to keep books and records that accurately reflect all transactions.

the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.

1. limiting the size of bank loans reduces cost of moral hazard by increasing the chance that the borrower will repay the loan to maintain a sound credit rating.
2. to compensate for high risk borrowers that don't have collateral to offer banks they would have to raise interest rate but that would discourage good loaners so they keep interest rates low and don't loan to risky people.

red lining is preventing someone from getting a loan based on a actual or bias reason. Illegal redlining is when they wont give you a loan based on where you live or the color of your skin. Legal redlining is based on your credit score

required minimum amount that the business taking out the loan must maintain in a checking account with the lending bank.(also a collateral asset)

very small loans, it is a very labor intensive process, based on a cultural pressure system, higher interest rates but not excessive, makes credit more accessible

prevent domestic investors from investing internationally or preventing international investors from investing domestically through government imposed variables

the relocation by a company of a business process from one country to another -- typically an operational process, such as manufacturing, or supporting processes, such as accounting. Even state governments employ offshoring

based out of New York caused a panic in the banking market which led to the creation of the federal reserve

believed that through restricted lending and poor monetary policy the federal reserve extended the Great Depression

warned the US government about hording gold and the money multiplier effect

claimed that there should be a stronger role of the fed. believed that banks should hold 100% in reserves

- a specialized intermediary in consumer lending, taking deposits from and making loans to individuals who are well known to one another, typically work at the same firm or in the same industry.

set up tariffs that weakened the US economy during the great depression

prevented national banks from owning banks outside of there state. force national banks to go by state bank regulations

In a foreign exchange situation where the domestic current spot exchange rate is trading at a higher level then the current domestic futures spot rate for a maturity period. A forward discount is an indication by the market that the current domestic exchange rate is going to depreciate in value against another currency.

highly regulated banking industries, excess employment, more latent capital, credit was a lot more restricted and more labor intensive, ant competition, separated commercial and investment banking

savings and loans crisis;the Tax Reform Act of 1986 significantly decreased the value of many such investments which had been held more for their tax-advantaged status than for their inherent profitability; The deregulation of S&Ls gave them many of the capabilities of banks, without the same regulations as banks; In an effort to take advantage of the real estate boom and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent; the end of inflation by Paul Volker

is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization.

The U.S. Government Accountability Office is in charge of auditing the fed other than a the topics it prohibits

began holding public announcements for changes to the discount rate. This gave the Federal Reserve a lot more power

(chairman of the fed) war on inflation. He raised interest rates, tightened credit, and triggered the most punishing economic slump since the 1930s.
Rise of in concerns for the Fed

the higher the inflation the lower the unemployment because real wage rates have decreased due to the decrease in the value of the money. Inflation weakens investment because people are worried there invested money is losing value so they spend it.

to control the monetary base the fed buys and sells securities, normally government securities

currencies or bank deposits are exchanged immediately. the current exchange rate

currencies or bank deposits are to be exchanged at a set date in the future. investors sign the contract today for a given quantity of currency and exchange rate at a specific future date. on the date of the transaction the rate is called the exchange rate

is a small decline in either the ability or the willingness of banks to lend at any particular interest rate

is a massive decline in either the ability or willingness of banks to lend at any particular interest rate

a potential fluctuation in an asset's value because of an increase or decrease in exchange rates

offer claims on diversified portfolios of assets, reducing transactions cost for individual savers. Insurance company offer risk pooling against uncertain events

offer claims on portfolios of assets as well as less liquid assets

commercial banks offer lower transactions and information cost than financial markets investment banking underwrites processes and advises firms on external financing

-Japan-post world war 3 Japanese gov prevented issuing securities internationally or issuing risky debt instruments in domestic financial markets
-Russia- Putin devalued the Ruble by 35%. he then devalued it again by 50%. This made Russian goods cheap which increase trade. 60% of GDP military spending was milit

When MONETARY POLICY becomes impotent. Cutting the rate of INTEREST is supposed to be the escape route from economic RECESSION: boosting the MONEY SUPPLY, increasing DEMAND and thus reducing UNEMPLOYMENT. But KEYNES argued that sometimes cutting the rate of interest, even to zero, would not help. People, BANKS and FIRMS could become so RISK AVERSE that they preferred the LIQUIDITY of cash to offering CREDIT or using the credit that is on offer. In such circumstances, the economy would be trapped in recession, despite the best efforts of monetary policymakers.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies

principles are the majority share holders that own the company, agents are the managers that run the company. this moral hazard is due to the fact that managers and owners might not have same incentive to maximize profit.

when either the bank or the lender have superior information over the other