Lecture notes, lectures 6 - 8 PDF

Preview

Summary

Download Lecture notes, lectures 6 - 8 PDF

Description

HAAS SCHOOL OF BUSINESS UGBA10

Principles of Business Module 1, Lecture 6

John Briginshaw

Contact Details • Professor: John Briginshaw • Email: [email protected] • Office hours: Monday 10am – 11am (also after class) • Office F502J Haas

• …and don’t forget to check out bcourses !!!

Learning Objectives for Today: The “Fed” and the US & Global Economy • The role of the Federal Reserve (“Fed”) – Management of the economy • What is/was “Quantitative Easing”?

– Management of the banking system

• Global economy and foreign exchange • Marketplace II: Extracting and understanding the key info and the numbers Follow-up: Tophat questions: government spending, Forex, Marketplace audio

Lecture 6 Agenda Federal Reserve – What it does Current Economy – Gauging the Temperature

Coming Attractions

The Federal Reserve System • Federal Reserve System (The Fed) – central bank of the United States, which acts as the government’s bank, serves member commercial banks, and controls the nation’s money supply

The Functions of the Fed • • • •

The Government’s Bank The Bankers’ Bank Check Clearing Controlling the Money Supply – Tools: Reserve Requirement – Discount Rate/Federal Funds Rate (Key Rate) – Open-Market Operations

The Two Arms of Government Policy • Fiscal Policy – – – –

Tax compared to spending Decided politically by Congress Managed by the Treasury Bond operations executed by the Bureau of the Fiscal Service

• Monetary Policy – Management of money supply and interest rates – Managed by the Federal Reserve – Operates under more of a political consensus

Controlling the Money Supply • Monetary Policy - management of the nation’s economic growth – by managing the money supply – by managing interest rates

• By controlling these two factors, the Fed influences the ability and willingness of banks throughout the country to loan money.

The Tools of the Fed • Reserve Requirement – percentage of its deposits that a bank must hold in cash or on deposit with the Fed

• Discount Rate – interest rate at which member banks can borrow money from the Fed

The Tools of the Fed (cont.) • Federal Funds Rate (Key Rate) – interest rate at which commercial banks lend reserves to each other, usually overnight

• Open-Market Operations – the Fed’s sale and purchase of securities in the open market • Fed buys securities – money supply increases • Fed sells securities – money supply decreases • Historically has been limited to treasury securities

The Changing Money and Banking System • Government Intervention – Assistance in Bank Reorganizations – Government Emergency Investment – Assurances of Repayment

• Quantitative Easing (QE) – Create money to buy assets rather than using the cash that banks deposits under the reserve requirements – Buy a much wider range of securities in particular mortgage backed securities (MBS) – QE ended in October 2014

QE was (?) a huge program Total Assets of the Federal Reserve ($bn)

2016

2015

2013

2012

2011

2010

2009

2008

2007

2014

https://fred.stlouisfed.org/series/WALCL

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

Of which $2.5bn Treasuries, $1.7bn MBS

Automated Clearing House (ACH) Network • Automated Clearing House – electronic funds transfer system that provides interbank clearing of electronic payments for the nation’s financial institutions – network allows businesses, government, and consumers to choose an electronic-over-paper alternative for payments

Automated Clearing House (ACH) Network (cont.) • ACH payments include: – Internet-initiated debit and credit payments by businesses and consumers – direct deposit of payroll, Social Security benefits, and tax refunds – federal, state, and local tax payments – e-checks – direct payment of consumer bills: mortgages, loans, utility bills, and insurance premiums

Check 21: Making the Paper Check Go Away • Check Clearing for the 21st Century Act (Check 21) – allows a receiving bank to make an electronic image of a paper check and electronically send the image to the paying bank for instant payment instead of waiting days for the paper check to be physically transported (!) back to the sender.

The Impact of Electronic Technologies • Point-of-Sale (POS) Terminal – electronic device programmed with electronic money that transfers funds from the customer’s bank account to pay for retail purchases

• Smart Card – Plastic card with an embedded computer chip that can be programmed with electronic money or used as credit card – Commonly used in Europe and being adopted in USA but.... • Chip and PIN (Europe)

 Chip and sign (USA)

• NFC based payment – secure payment using smartphone • e.g ApplePay

 e.g Google Wallet

Currency Values and Exchange Rates

• Exchange Rate

– the value of one currency compared to the value of another, e.g. $/Euro – A high $/Euro exchange rate means that US tourists can buy accommodation and gifts cheaply abroad but discourages foreign tourists as their money does not go so far – A high exchange rate means that US firms and consumers can get a lot of imported goods for their dollars but means that US exports look expensive to buyers in Europe

International Bank Structure • World Bank – UN agency that provides a limited scope of financial services, such as funding improvements in underdeveloped countries

• International Monetary Fund (IMF) – UN agency consisting of about 150 nations that have combined resources to promote stable exchange rates, provide temporary short-term loans, and serve other purposes

The Major Players • Federal Reserve – US • European Central Bank – European – Other important central banks are Bank of Japan and Bank of England

• World Bank President – by tradition a US national • IMF President – by tradition a European

Lecture 6 Agenda Federal Reserve – What it does Current Economy – Gauging the Temperature

Coming Attractions

Marketplace (I) • We do the numbers (stock indices)

Stock Indices • Indicate what has happened to stock prices, on average • Dow Jones Industrial Average (“Top 30”) • NASDAQ (“Naz-Dack”) – Tech weighted • S & P 500 – Most broad based average

Marketplace (II) • We do the numbers (bond prices)

Bond Market - borrowing • Bonds pay a fixed amount per year – That looks like a good deal if interest rates are going lower – It looks like a bad deal if rates are increasing • So if bond prices rise – people are seeing rates go lower and want to lock in the fixed payments • And vice versa - If bond prices fall, that is because investors see better deals elsewhere than fixing the payments, because interest rates are going up

Lec. 5 last: Concept of Present Value • Cash now is preferred to cash in the future – Represented by t – the number of years

• If the future cash has risk (you might not get it(!)) that is even worse – Represented by r – the expected rate of return – Higher risk must provide higher expected return  Present Value, PV = FV (1+r)t => Future Value, FV = PV x (1+r)t

Bonds and Present Value • Bonds are fixed income securities • A person who “buys” a bond (the bond buyer, investor or lender) buys the right to fixed future cash flows  Present Value = bond price =

Ci

∑ (1+r)

i

• This is why, when interest rate (r) goes up, bond price goes down

T-Bonds trade in a liquid market • The treasury is the dominant borrower • So supply and demand for its bonds set the terms for borrowing by others – Affects mortgage borrowing • See www.bankrate.com for a daily update

– Other borrowing such as auto and student loans

Lecture 6 Agenda Federal Reserve – What it does Current Economy – Gauging the Temperature

Coming Attractions

Next Weeks • Next week is exam week! – Monday – Personal Finance – Wednesday – Review Lecture – Friday – EXAM!!!

• Week after is SIM week

Sim Week • Next week is exam week! • Week after is SIM week – Professors and SIM Master get together to give useful info on the simulation – Now – register CAPSIM – Tuesday 9/20 - complete questionnaires – First round decisions - Friday 9/23 in class (required attendance)...