lecture10+11 - Economics 310 Money and Banking Lecture10...

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Economics 310 Money and Banking Lecture 10 University of  Michigan Fall 2010  
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2 Lecture 1 Reading Bond Market and Interest Rates Chapters 4 and 5 First Exam: Monday, October 18 8:00 pm Practice exam available No calculators, electronic devices or blue book Exam
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3 Lecture 1 The sub-prime mortgage market and  the credit crunch Immediate problem Institutions holding large quantities of mortgage-backed securities faced serious liquidity shortage Not an issue of the long-term viability of the institutions Danger of this lack of liquidity: Institutions not confident to lend to other institutions or for real investment The reduced liquidity for the lending institutions means reduction in liquidity for the economy as a whole
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4 Lecture 1 The sub-prime mortgage market and  the current credit crunch Unprecedented sequence of efforts from the Fed and Treasury to bolster supply of liquidity to embattled financial institutions 1. Direct expansion of the money supply Open market bond purchases, and reduction in interest rates 2. Extension of discount loans to investment banks 3. Direct purchase/swaps of non-government securities Government securities initially account for over 90% of Fed assets; within 12 months that figure falls to around 50% 4. Issue non-discount loans to various institutions (e.g. AIG) 5. Nationalization of Fannie Mae, Freddie Mac and AIG 6. TARP
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5 Lecture 1 Money Base
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6 Lecture 1 Total Reserves
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7 Lecture 1 Excess Reserves
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8 Lecture 1 M1
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9 Lecture 1 M1 Multiplier
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10 Lecture 1 The Bond Market and Interest Rates We have discussed OMOs as an instrument of monetary policy Central bank buys or sells any asset Controls the money supply Usually involves sale or purchase of Treasury Bonds Modern monetary practice focuses on interest rates as the instrument of policy
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