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money banking financial markets

Questions and Answers of Money Banking Financial Markets

At a hearing before a committee of the House of Representatives, former Fed Chairman Ben Bernanke was asked about legislation that would direct the GAO to audit the Fed’s monetary policy actions.
Is it easier for a central bank to be independent in a high-income country or in a low-income country? What implications does your answer have for what the average inflation rate is likely to be in
In the first volume of his history of the Federal Reserve System, Allan Meltzer titled one of his chapters “Under Treasury Control, 1942–1951.” Why would Meltzer have considered the Fed to have
Which body is more important within the Federal Reserve System: the Board of Governors or the Federal Open Market Committee? Briefly explain.
How is the European Central Bank organized? What special problems does it confront? What difficulties did it encounter during the financial crisis of 2007–2009 and the subsequent sovereign debt
Briefly discuss the main arguments for and against the Fed’s independence.
Why was the Federal Reserve System split into 12 districts?
Go to sdw. ecb.europa.eu and select “Government Debt (as a % of GDP).” What is the current eurozone debt/GDP ratio? What is the deficit/GDP ratio? What challenges do the deficit and debt data
What are the major differences between the public interest view of the Fed’s motivation and the principal–agent view? How are these views connected to the theory of the political business cycle?
Why did the United States have no central bank between 1836 and 1913? Why did Congress decide to establish the Federal Reserve System in 1913?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred. stlouisfed.org) and download and graph the growth rate for real GDP in Greece (GRCGDPRQPSMEI) from the first quarter of 2000
What is the main problem with having a central bank that is not independent of the rest of the government?
Compare the length of terms of office for central bank heads and members of central bank governing boards between the U.S. Federal Reserve and foreign central banks.
In what ways is the Fed subject to external pressure?
Shortly after the Federal Reserve arranged for JPMorgan Chase to purchase Bear Stearns in March 2008, the Wall Street Journal recounted the events that led to the extraordinarily low price that
Carmen Reinhart and Kenneth Rogoff have argued that the 2007–2009 financial crisis explains not just the severity of the accompanying recession but also the slowness of the subsequent economic
In 2016, financial regulators ordered significant changes in the “living wills” prepared by five large banks. According to an article in the Wall Street Journal, the wills as submitted didn’t
An article in a Federal Reserve publication notes that during the financial crisis, the Federal Reserve lent $29 billion to help in JPMorgan Chase’s purchase of Bear Stearns. The article asks:
In describing the performance of the Federal Reserve during the Great Depression, former Federal Reserve Chairman Ben Bernanke has written: “The Fed proved far too passive during the Depression. It
In their book This Time Is Different, Carmen Reinhart and Kenneth Rogoff conclude: “An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting
Financial journalist James Stewart notes that in contrast to its actions with respect to Lehman Brothers: “the Fed did lend into continuing runs at both Bear Stearns and A.I.G., although officials
In discussing the 2007–2009 financial crisis, Federal Reserve Vice Chairman Stanley Fischer observed: “The fact that losses in what was a relatively small part of the mortgage market quickly
In his history of the Federal Reserve, Allan Meltzer of Carnegie Mellon University describes the views of Federal Reserve officials in the fall of 1930:Most of the policymakers regarded the
Economist Laurence Kotlikoff of Boston University has proposed that the banking system be reformed so that all banks become “limited purpose banks.” As he explains:[Banks] would simply function
In a paper looking back at the financial crisis, former Fed Chairman Alan Greenspan wrote: Some bubbles burst without severe economic consequences, the dotcom boom and the rapid run-up of stock
Looking back at the financial crisis several years later, former Fed Chairman Alan Greenspan argued:At least partly responsible [for the severity of the financial collapse] may have been the failure
A columnist writing in the Wall Street Journal observed: “Franklin D. Roosevelt’s March 1933 inaugural line ‘that the only thing we have to fear is fear itself’ was inspiring, but wrong.
A classic account of bank panics was published in 1879 by Walter Bagehot, editor of the Economist, in his book Lombard Street: “In wild periods of alarm, one failure makes many, and the best way to
Former Federal Reserve Chairman Ben Bernanke has observed: “Even a bank that is solvent under normal conditions can rarely survive a sustained run.”a. What does Bernanke mean by “solvent under
An article in the Wall Street Journal notes: “Higher capital requirements effectively limit how much SIFIs can borrow, and can crimp profitability.”a. What is a SIFI? Why does the Dodd-Frank Act
In a blog post, former Federal Reserve Chairman Ben Bernanke described the four “basic elements” of a financial crisis: “broad-based loss of confidence in banks, runs by providers of short-term
In his memoirs, Herbert Hoover described the reaction of his Treasury secretary to the Great Depression:First was the “leave it alone liquidationists” headed by Secretary of the Treasury Mellon,
In describing the bank panic that occurred in the fall of 1930, Milton Friedman and Anna Schwartz wrote:A contagion of fear spread among depositors, starting from the agricultural areas, which had
The financial writer Sebastian Mallaby made the following observation about hedge funds: Leverage also made hedge funds vulnerable to shocks: If their trades moved against them, they would burn
An article in the New York Times published just after the Fed helped save Bear Stearns from bankruptcy noted:If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage
In academic research published before he entered government, Fed Chairman Ben Bernanke wrote:[In] a system without deposit insurance, depositor runs and withdrawals deprive banks of funds for
How do currency crises occur? Why have some European countries been suffering from a sovereign debt crisis?
A column in the Wall Street Journal by the governor of the central bank of Sweden discussing the Basel accord makes the following observation: “One clear lesson from the [financial] crisis is that
An article in the New York Times quotes former Fed Chairman Alan Greenspan as arguing:The global house price bubble was a consequence of lower interest rates, but it was long-term interest rates that
In June 1930, a delegation of businessmen appeared at the White House to urge President Herbert Hoover to propose an economic stimulus package. Hoover told them: “Gentlemen, you have come sixty
What are the two methods that governments typically use to avoid bank panics?
Why might deposit insurance encourage banks to take on too much risk? Is deposit insurance, therefore, a bad idea? Briefly explain.
Briefly discuss the policy actions the Federal Reserve and the Treasury took during the financial crisis of 2007–2009.
Briefly summarize the four explanations of why the Federal Reserve failed to intervene to stabilize the banking system in the early 1930s.
Does a bank have to be insolvent to experience a run?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for the interest rate on Baa-rated corporate bonds (DBAA) from January
What innovations did banks develop to get around ceilings on deposit interest rates?
How can an investment bank experience a “run”? Briefly describe the effect the runs on Bear Stearns and Lehman Brothers had on the U.S. economy.
How did the debt-deflation process contribute to the severity of the Great Depression?
Why does a financial crisis typically result in a recession?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for the unemployment rate (UNRATE) from January 1948 until the most
How is being a lender of last resort connected to the too-big-to-fail policy?
What does it mean to say that there is a bubble in the housing market? Briefly describe the effect that the bursting of the housing bubble in 2006 had on the U.S. economy.
What role did the bank panics of the early 1930s play in explaining the severity of the Great Depression?
Many investment banks practice an “up or out” policy, with new hires being either fired or promoted within a few years. Many large law firms and accounting firms use a similar policy, as do
Private medical insurance companies sell policies that allow policyholders to make premium payments in exchange for the insurance company paying some or all of the policyholders’ medical bills. An
An editorial in the Wall Street Journal argues that: “there’s no evidence that [repealing the Glass-Steagall Act in 1999] had anything to do with the [2007–2009 financial] crisis.” Briefly
Ben Bernanke served as chairman of the Federal Reserve during the financial crisis of 2007–2009. In his account of those years, he observed:Seen from the vantage point of early 2007, the
According to an article in the Wall Street Journal:“Life insurers earn much of their profit by investing customers’ premiums in bonds until claims come due. They have typically favored
A publication of the Securities and Exchange Commission (SEC) notes that to invest in a hedge fund, “you generally must be an accredited investor.”a. What is an accredited investor?b. The
An article in the New York Times observes that “the Glass-Steagall Act … forced the separation of investment banking from commercial banking” and “Glass-Steagall aimed to protect the common
In March 2008, the U.S. Treasury and the Federal Reserve arranged for the sale of the Bear Stearns investment bank to JPMorgan Chase in order to prevent Bear Stearns from having to declare
In 2016, some industry analysts believed that automobile sales had reached a peak and might begin to decline. JPMorgan Chase CEO Jamie Dimon was quoted in an article in the Wall Street Journal as
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for the value of mutual fund shares owned by households (MFSABSHNO)
According to an article in the Wall Street Journal:“Jorge Rodriguez, owner of a Peruvian restaurant in Los Angeles, said Wells Fargo & Co.—his bank for several years—turned him down …
An article in the Wall Street Journal in 2016 notes that in explaining the low stock price of the Citigroup bank: “Investors … have only to look to the bank’s return on equity. That was just 7%
Suppose that insurance companies in Ohio are reluctant to offer fire insurance to firms in lowincome neighborhoods because of the prevalence of arson fires in those neighborhoods. Suppose that the
In describing the work of hedge funds, financial journalist Sebastian Mallaby has observed: [Research] showed that the unglamorous “value” stocks were underpriced relative to overhyped
What incentives would the partners in an investment bank have to convert the firm into a public corporation? If becoming a public corporation increases the risk in investment banking, how do publicly
An article by an economist at the International Monetary Fund about the shadow banking system notes:As long as investors understand what is going on and such activities do not pose undue risk to the
In 2016, the long-run returns to the investments made by public pension funds fell to their lowest levels in many years and were expected to fall further as long-run interest rates remained low. One
An article in the Wall Street Journal notes: “Hedge funds typically charge higher fees than other money managers.”a. What is a hedge fund?b. What fees do hedge funds typically charge? How do
Suppose that you intend to buy a house for $200,000. Calculate your leverage for this investment in each of the following situations:a. You pay the entire $200,000 price in cash.b. You make a 20%
In an account of the financial crisis, Roger Lowenstein described the problems affecting the Merrill Lynch investment bank: “too much leverage, too much relying on short-term [borrowing], and
With 401(k) retirement plans, both the employer and the employee make contributions that are then invested, typically in mutual funds. A column in the Wall Street Journal describing these plans
In referring to the collapse of the Long-Term Capital Management hedge fund in 1998, an article in the New York Times noted: Starting with just $5 billion in capital, the fund was able to get $125
As noted in the chapter, in 2016, new regulations meant that prime money market funds would have to price shares in a fund purchased by institutional investors at the fund’s net asset value (NAV)
A 2016 column in the New York Times notes that: “about two decades ago … employers began replacing traditional [pension] plans with ‘defined contribution’ plans like 401(k)’s.”a. What are
David Wessel of the Brookings Institution has described what happened with the Reserve Primary Fund, a money market mutual fund, on September 16, 2008:At 4:15 p.m., the fund issued a press release.
An article in the Wall Street Journal describes the following financial deal: “Private-equity firm KKR & Co. sold 15 million shares of Walgreens Boots Alliance Inc. to Citigroup Inc…. The
During the financial crisis of 2007–2009, the U.S. Treasury implemented the Guarantee Program for Money Market Funds, which insured investors against losses on their existing money market mutual
Suppose that as an employee of a large firm, you are given the choice between a defined benefit pension plan and a defined contribution pension plan. From your point of view, what are the advantages
How are banks able to attract small savers if small savers can usually receive a higher interest rate from money market mutual funds than from bank savings accounts?
A review of a biography of the British investment banker Siegmund Warburg states that Warburg believed: Investment banking should not be about gambling but about … financial intermediation built on
In what ways are insurance companies financial intermediaries? What is the difference between a life insurance company and a property and casualty insurance company?
How are finance companies able to compete against commercial banks?
What is leverage? Which were more highly leveraged prior to the financial crisis of 2007–2009: commercial banks or investment banks? Briefly explain why. What became of the large, standalone
Why have runs on commercial banks become rare, while several shadow banking firms experienced runs during the financial crisis?
What is the difference between a defined contribution pension plan and a defined benefit plan? What benefits do employees receive from saving for retirement using 401(k) plans?
What is the difference between retail funding and wholesale funding? Which type of funding do commercial banks mainly rely on? Which type of funding do investment banks mainly rely on?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for Retail Money Funds (WRMFSL) and for Institutional Money Funds
In what ways does the shadow banking system differ from the commercial banking system?
In what ways are contractual savings institutions similar to commercial banks? In what ways are they different?
In what ways are investment institutions similar to commercial banks? In what ways are they different?
What are the key differences between investment banks and commercial banks?
A bank executive was quoted as arguing: “TARP successfully stabilized not only the banking industry but a number of other industries as well.” Why might stabilizing the banking industry have
Suppose that you are considering investing in a bank that is earning a higher ROE than most other banks. You learn that the bank has $300 million in capital and $5 billion in assets. Would you become
The Capital Purchase Program carried out under TARP represented an attempt by the federal government to increase the capital of banks. Why would the federal government consider it important to
According to an article in the Wall Street Journal, in 2016, JPMorgan Chase’s leverage ratio was 6.2%. The bank’s return on equity (ROE) was 9%. Calculate the bank’s ROA.
The following entries (in millions of dollars) are from the balance sheet of Rivendell National Bank (RNB):U.S. Treasury bills .......................................$20Demand deposits

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