Lesson+4+-+Instruments+of+the+Money+Market

Lesson+4+-+Instruments+of+the+Money+Market - Lesson 4 The...

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Unformatted text preview: Lesson 4 The Interbank Market For Reserves and Instruments of the Money Market Special Report: Instruments of the Money Market, (Chapter 1) http://www.richmondfed.org/publications/research/special_reports/inst ruments_of_the_money_market/index.cfm Fractional ReservesRemember the Bailey Brothers Building & Loan What Happens If A depositor Wants to Withdrawn $2000? Ba ile y Brot h e rs Bu ildin g & Loa n asse t s lia bilt ie s $ 1 ,0 0 0 Re se r v e s $ 1 0 ,0 0 0 De p osits $ 9 ,0 0 0 Mor tga ge s What Is The Bailey Brothers Building & Loan (BBB&L) to Do? Choice One Call in Loans (i.e foreclose on Mrs Macklins House Choice Two---Sell Assets Choice Three Try to borrow money from Mr. Potter or another bank Choice Four Jump off bridge to collect on life insurance policy George attempted to persuade Mr Potters bank to lend reserves. This is what we call today the buying of Fed Funds. Mr Potter was disinclined because he didnt believe the Building & Loan was good for the money. He wanted collateral.A collateralized interbank loan is often called a Repurchase Agreement. George Decides It is Best to Jump Off Bridge Too Bad George Didnt Come to Us (Rutgers National Bank), We would have sold him reserves (Fed Funds) BBB&L Buys $100 Reserves from RNB Rutgers National Bank Clearinghouse asset s liabilt ies asset s liabilt ies- $100 RNB- $100 Reserves + $100 BBB&L + $100 FF to BBB&L Bailey Bros Building & Loan asset s liabilt ies + 100 Reserves + $100 Due to RNB Ultimately, George is rescued by Clarence his guardian angel (or was it Ben Bernanke) The Federal Reserve could have saved George by lending reserves to the BBB&L through the Discount Window In the end everything works out. The taxpayers of Bedford Falls pitched in TARP monies to bail out the BBB&L Had George come to RNB and we sold him...
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Lesson+4+-+Instruments+of+the+Money+Market - Lesson 4 The...

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