Alan Greenspan

1
Alan Greenspan

• As chairman of the Federal Reserve Board is
  considered by many to be the most powerful
  economic actor in the world..

2
What makes this handsome devil so powerful?

• The United States has the largest economy in the
  world
• The US President must have congressional approval
  on all tax and spending items

3
Feds control over the money supply

• First, what is money?
• Money is not just currency
• To the economist
• Money must have three functions
• 1. Medium of exchange
• 2. Store of Value
• 3. Unit of Account (measure of value)
• Are casino chips money? Within the wall of the
  casino they meet the three functions of money and
  therefore are money.

4
The Economic definition of money

• To measures money economist use a variety of
  definitions of money.
• M1 money includes currency, travelers checks,
  and checking accounts.
• M1 money equals about 1/8 of the GDP and because
  its very liquid and circulates is a very
  important measure of the economy. M1 money can be
  controlled.
• M2 money includes M1 plus savings accounts and
  money market mutual funds.
• M3 Money includes everything in M2 plus
  certificates of deposit and other time deposits.

5
Money and Banking

• There is clearly a link between money (spendable
  income) and the central banking system
• much of the money is held in bank accounts
• money has to circulate in the economy
• government can control the amount of through its
  regulation of the banking system.

6
The Federal reserve and its tools

• The Fed is a Quasi-public corporation - a
  private corporation with some strong public
  elements. A private corporation owned by all the
  federally chartered banks. It is essentially the
  nations central bank.

7
The Federal Reserves Bank

• Seven of the twelve members of its Board of
  Governors are appointed by the President of the
  United States
• The Chairman is appointed to a 4 year term , and
  can be re-appointed
• Five members are selected from the regional
  Federal Reserve Banks.
• There are twelve regional Federal Reserve head
  offices ( ours is in San Francisco).

8
Tools of the Fed (or any central bank in a
country).

• 1. Reserve Requirement the percentage of
  deposits banks must keep in reserve (currently 3
  on deposits up to 42million and 105 on deposits
  over 42 million).
• 2. The Discount Rate the interest rate banks are
  charged to borrow from the fed (currently2).
• 3. Open market operations the buying and selling
  of Treasury Bonds. If the Fed buys bonds from the
  member banks , then the banks have more money to
  lend and charge lower interest rates. If the Fed
  sells bond to the banks the banks, then the banks
  have bond but also less money to lend and will
  charge higher interest rates.

9
Loose Money and Tight Money

• the primary function of the Federal Reserve is to
  set MONITARY POLICY
• A loose money policy
• expand the money supply to increase overall
  demand in the economy
• How?
• 1. Lower Discount Rate
• 2. Lower Reserve Ratio
• 3. Buy Treasury Bonds
• Tight money policy
• reduce the money supply discourage lending and
  overall demand in the economy.
• How?
• 1. Higher Discount Rate
• 2. Higher Reserve Ratio
• 3. Sell Treasury Bonds

10
The major function of the Federal Reserve and the
4 economic goal of the US economy

• 1. An expansionary ( loose) monetary policy will
  reduce interest rates, stimulate demand, create
  jobs and thus reduce cyclical unemployment.
• 2. A tight monetary policy will raise interest
  rates, reduce overall demand in the economy, and
  reduce inflation.
• 3. Low and stable interest rates provide a
  framework for long-term investment decisions and
  sustained economic growth.