Brief Outline of Topics Covered in Lecture 5
Chapter 12 Structure of Central Banks and the Federal Reserve System
Origins of the Federal Reserve System
- Distribute power to geographic regions, the public sector, the private sector, the business sector, and the financial sector
Formal Structure of the Federal Reserve System
- Federal Reserve Banks
- Member Banks
- Board of Governors of the Federal Reserve System
- Federal Open Market Committee (FOMC)
- The Federal Advisory Council (FAC)
Informal Structure of the Federal Reserve System
- How Power Has Been Centralized Over Time
How Independent is the Fed?
Should The Fed Be Independent?
- The Case for Independence
- The Case Against Independence
Homeworks 1 and 2 due at end of class.
Materials from class:
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The Twelve Federal Reserve Districts
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Central Bank Independence and Inflation
From "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," by Alberto Alesina and Lawrence H. Summers, Journal of Money, Credit and Banking, Vol. 25, No. 2. (May, 1993), pp. 151-162 (the link will work on UO net, but I don't expect you to read the paper as it is a bit technical):
This has changed with the adoption of inflation targeting by central banks. Note also that Adam Posen casts doubt on whether causality runs from central bank independence to improved macroeconomic performance in Central Bank Independence and Disinflationary Credibility: A Missing Link?, NY Fed Staff Report, May 1995.
Video:
Lecture 5 [Google video] - Fall 2008
Lecture 5
Additional Reading:
- Credit Default Swap fault-lines: Lessons from 2005 GM, Ford crisis - Vox EU
- Bringing money markets back to life - Vox EU
- Bernanke: We're Laying the Groundwork for Recovery
- Intervention Is Bold, but Has a Basis in History - NYTimes.com
- Treasury secretary too slow to act - Barry Eichengreen
- Why don’t we trust a stranger? Ties that bind - Vox EU
- Honoring Paul Krugman, by Edward L. Glaeser
Application:
U.S. Investing $250 Billion in Banks, NY Times: The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks... The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers...
And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses...
Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.
Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase... The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes. ...
Bringing together all nine executives and directing them to participate was a way to avoid stigmatizing any one bank that chose to accept the government investment.
The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.
The next immediate step is to begin purchasing distressed assets:
As Treasury embarked on its recapitalization plan, it offered some details on the nuts-and-bolts of the broader bailout effort. The program’s interim head, Neel T. Kashkari, said Treasury had ... named an investment management consultant ... to help it select asset management firms to buy distressed bank assets. And it plans to announce the firm that will serve as the program’s prime contractor, running auctions and holding assets, within the next day. ...
