Brief Outline of Topics Covered in Lecture 6
Chapter 14 Determinants of the Money Supply
The Money Supply Model and the Money Multiplier
- Deriving the Money Multiplier
Factors That Determine the Money Multiplier
- Changes in the Required Reserve Ratio, r
- Changes in the Currency Ratio, c = C/D
- Changes in the Excess Reserves Ratio, e = ER/D
Additional Factors That Determine the Money Supply
- Changes in the Nonborrowed Monetary Base, MBn
- Changes in Borrowed Reserves, BR, from the Fed
Chapter 15 Tools of Monetary Policy
The Market for Reserves and the Federal Funds Rate
- Supply and Demand in the Market for Reserves
- How Open Market Operations, Discount Lending, and Changes in Reserve Requirements Affect the Federal Funds Rate
Open Market Operations
- Daily Conduct
- Advantages of Open Market Operations
Discount Policy
- Operations of the Discount Window
- Lender of Last Resort
- Advantages and Disadvantages of Discount Policy
Reserve Requirements
- Disadvantages of Reserve Requirements
Materials from class:
Video:
Lecture 6 [Google video] - Fall 2007
Lecture 6 [Media Player] - Fall 2007
| Economics 470 Lecture 6 |
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Previous (these were taped outside of class):
Lecture 6 - Chapter 14, pgs. 351-367; Chapter 15, pgs. 373-389
Google Video
Additional Reading:
- Regulatory Relief for Banking Organizations (eliminating open market operations)
- EU plans market reforms to avert crisis - FT.com
- Recent Financial Developments and the Economic Outlook -Yellen - SF Fed
- Real Estate in the U.S. Economy - Poole - St. Louis Fed
- FOMC minutes show unity on rate cut - FT.com
- Banks that say "sorry," and the investors who love them too much - D. Gross
- NASA: major step toward knowing origin of cosmic rays - EurekAlert
- Cassini on the trail of a runaway mystery - EurekAlert
- Fed Left Plans for Further Cuts Dependent on Data - Bloomberg
- Herding aphids -- how 'farmer' ants keep control of their food - EurekAlert
- There May Be an Out for Some Subprime Borrowers: John M. Berry
Application:
John Berry says there may be hopeful news on the subprime crisis:
There May Be an Out for Some Subprime Borrowers, by John M. Berry, Bloomberg: The subprime mortgage market is largely a mystery to most of the public, and to many of the public officials trying to find ways to mitigate the damage done to borrowers caught up in it. ...
Helping owners already faced with the possibility of foreclosure requires knowing how the problems developed, which is why Eric S. Rosengren, president of the Boston Federal Reserve Bank, initiated a project to gather data on the subprime market in New England and what has happened to the people who used such mortgages. ...
What the Boston Fed researchers have found so far has convinced Rosengren that many of the troubled homeowners may qualify for a prime loan that could be profitable for community banks in the region if they are willing to go after the business. ...
[T]he researchers also found that almost two-thirds of borrowers in the county who got subprime mortgages had FICO credit scores above 620, which normally would have qualified them for a prime mortgage. ''And 18 percent had scores over 700,'' he said.
''They may have been in subprime products because they chose to make a highly leveraged home purchase, or they may have been steered to a more costly mortgage for which they might have otherwise qualified,'' Rosengren said. ''Either way, it is encouraging to note that these borrowers could be in a position to refinance to another product.''
Even though home prices are falling in parts of New England, as they are in many other areas, many subprime mortgage holders have been in their homes long enough that they may have enough equity to allow them to refinance into a prime loan. In some cases, simply having made their mortgage payments will also have improved their credit scores.
With the rates on subprime loans so much higher, ''if these borrowers could qualify for a prime product they would likely see a significant reduction in their interest rate,'' Rosengren said.
Part of the underlying problem is that banks and thrift institutions largely ceded the subprime market to the aggressive, unregulated brokers. The brokers sought potential clients wherever they could find them. Most of the financial institutions usually sat back and waited for buyers to seek them out.
Not that all of the subprime borrowers were blameless for their plight. It's quite clear that many were extracting equity as their homes appreciated.
Yet, of the subprime mortgages originated between 1999 and 2004, two-thirds were paid off within two years and almost 90 percent within three years, Rosengren said.
''While some of those sales may have been under difficult circumstances, it is plausible that many borrowers who purchased homes with subprime products did benefit from the appreciation of home prices ... over the last decade,'' he said.
The data from the Boston Fed shows the very mixed picture in the subprime market. Yes, foreclosures are up, though with timely action by borrowers and financial institutions, many owners potentially in difficulty should be able to hold on to their homes. ...[B]ankers and banking organizations ... should realize there may be an opportunity here to make a buck and do some good in the process.
