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Chapter 15 Money, Banking, and Central Banking
Check Out Check 21 for Twenty-First Century Check Clearing
During the 1990s, the Federal Reserve decided to transfer most of its check-clearing operations to the
from cities of
-sorting facility. After they are
Converting Dollars into African Vouchers on the Web
Many immigrants to the United States from Kenya and Uganda get higher paying jobs to finance a higher
standard of living for themselves and their families who remain in Africa. To send money back to family
members in Africa one option is to use a Web site such as Mama Mikes. This Nairobi-based service allows
Insurers Face Facts as Customers Self-Insure More of Their Risks
A growing trend is for larger companies to manage risks with less insurance by applying portfolio
management techniques and utilizing sophisticated financial contracts. These companies have been regarding
546 Miller Economics Today, Nineteenth Edition
Greenbacks Abroad
For years estimates of the M1 money supply have seemed at odds with the amount of dollars that are printed
each year. Of the currency and coins circulating outside the banking system, more than 85 percent could
not be accounted for. University of Wisconsin economist Edgar L. Feige discovered that fully 45 percent
Why Banks Want Their Customers to Go Online
If more customers who use online banking services cost less to serve and also hold higher average
banking balances, then banks can increase their lending and interest and investment income.
How the U.S. Banking Structure Compares to the Rest of the World
Foreigners arriving in the United States are often overwhelmed by the number and kinds of financial
institutions that exist. The structure of the banking industry in the United States is quite different from
that of other industrialized countries. America is the only country that does not have a true national
banking system in which a relatively small number of banks have a large number of branches located
In China, Reserve Requirements Take Aim at High-Risk Banks
ve
requirements several times. In late 2003, it raised the reserve ratio for most deposits from 6.5 percent to
7.0 percent. The central bank intended for this change to reduce the money multiplier and slow the growth
of the money supply.
Lecture Extender Examples 547
548 Miller Economics Today, Nineteenth Edition
Deposit Insurance and the Fed
In testimony before Congress in 2003, then Federal Reserve Chairman Alan Greenspan said that deposit
insurance has prevented bank runs like those in the 1930s that could have undermined the banking system
ystem. He noted, however, that the prevailing levels of deposit insurance
increased risk-taking at insured depository institutions to levels that could endanger the financial system.
The upshot is that deposit insurance increases financial stability in the short run but increases risk-taking
by depository institutions to a degree that could create problems for the financial system.
Another issue associated with deposit insurance is that it makes it possible for depository institutions to
attract more funds, at lower interest rates, than would be the case without insurance. In effect, it allows
Moral Hazard and Securitization of Subprime Mortgages
The financial crisis in 2008 involved two financial innovations. These were the securitization of
mortgages and other debts such as credit card debts and credit default swaps. Fannie Mae and Freddie Mac,
two private corporations chartered by the federal government, purchased about one-half of the mortgages
Fannie Mae and Freddie Mac were able to raise money to buy more mortgages and were thus a major
Lecture Extender Examples 549
less diligent in verifying the risk of the mortgages in the security going bad. The sellers of the securities
likewise believed that securitization combined with CDSs spread out the risk so that no single security
would lose much value because it was unlikely that all of the mortgagees would default. The same
situation existed with the sellers of CDSs.
Because risk seemed to be contained, mortgage originators began applying looser standards for
borrowers. The more loans that they originated, the higher were profits. Because they did
not keep
covered by CDSs. The riskiness of subprime mortgages increased. Predictably, many more of these
Reserves and the Financial Crisis
As the financial crisis began in 2008, there was a fear that the banking system might suffer a repeat of 1929,
when thousands of banks failed. The Fed decided to begin supplying liquidity to the banking system on a
massive scale to prevent the systemic failure of banks and the financial system. In November 2007, the
level of reserves
borrowed reserves had risen to more than $675 billion. Total reserves had risen from about $41 billion in
November 2007 to about $415 billion in November 2008. Excess reserves increased from $1,696
billion in November 2007 to $364 billion in November 2008. During the same period, M1 increased from
$1,366 billion to $1,473 billion.
If the Fed had not been willing to lend reserves to the banking system, what would the level of bank reserves
have been in November 2008? What would the consequences have been for banks? (Hint: Total reserves
550 Miller Economics Today, Nineteenth Edition
Anatomy of a Roman Empire Bank Run
Bank runs were not confined to the United States during the Great Depression. In AD 33, there was a massive
bank panic in the Roman Empire. It started with the loss of three spice ships in a Red Sea hurricane. The
ships were owned by the firm of Seuthes and Son. The rumor spread in Rome that the firm was near
bankruptcy. Another important firm, Malcus and Company of Tyre, started to go under because of a strike by
its Phonecian workers and because of fraud by a trusted manager. Citizens of Rome learned meanwhile