Week 4 – Role of Finance in Business – Part 2

Week 4 – Role of Finance in Business – Part 2

“Overview … The Financial System – An Overview … The Financial System – The Role of Banks in Finance … The Financial System – The Federal Reserve … The Financial System – A Discussion Question … The Financial System – Laws and Regulations”
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Summaries

  • Week 4 - Role of Finance in Business - Part 2 > Week 4 Overview > Week 4 Overview
  • Week 4 - Role of Finance in Business - Part 2 > The Financial System - The Role of Banks in Finance > Role of Banks in Finance
  • Week 4 - Role of Finance in Business - Part 2 > The Financial System - The Federal Reserve > Overview of the Federal Reserve

Week 4 – Role of Finance in Business – Part 2 > Week 4 Overview > Week 4 Overview

  • This week we will cover the last of the course learning objectives as we look at stocks, bonds and financial institutions overall, with the special look into the role the Federal Reserve and the tools they use to control the supply of money and credit.
  • We’ll start with a reading that provides an overview the financial system and it many pieces including financial intermediaries and primary and secondary markets.
  • From there, we look to the Federal Reserve and the overarching role that it plays in the financial systems in the US. Finally, you have the opportunity to participate in a MOOCwide discussion on the laws and regulations impacting the financial system in the US. on our class wiki.

Week 4 – Role of Finance in Business – Part 2 > The Financial System – The Role of Banks in Finance > Role of Banks in Finance

  • Those people gave them something, whether it’s gold or a green piece of paper, that essentially says, this gold or this green piece of paper entitles you to some future goods and services.
  • Those people said, that’s a useful thing that I have.
  • There’s this pool of savings and let’s say there’s this other pool of entrepreneurs and they have a bunch of really good ideas for projects.
  • I have an idea that if I could get a bunch of people to dig canals to the crops, that we’ll be able to grow more crops throughout the year and we’ll all be richer because we’ll all have more food and that’s a true good and service in its best sense.
  • How am I going to get these people to build this ditch for me? I mean, I could maybe promise them in the future that once all of this is done, I can do something, give them more food, but that’s not the way it works.
  • You have a bunch of people who have already provided goods and services to the world and the world has given them trinkets- whether it’s gold coins or paper money.
  • Let’s just say it’s gold, right? And I want to make this point because everyone always talks about gold as if it’s something special, as if it really represents wealth, while paper money really does not represent wealth.
  • It’s lighter, and at least the paper money we use now, is not so easy to counterfeit.
  • I always want to make that- people always somehow feel that gold is somehow better than paper money.
  • We’ll talk in the future about inflation and deflation and the fact that there is a constraint on how much gold can be produced, but you can print money.
  • So a bunch of people perform a bunch of goods and services and they get these little coins.
  • How much of that coin you have to give for them to do it? It’s based on supply and demand and price, whatever.
  • How do I do that? Well, if I had gold or if I had these little coins, I could give these coins to these people, they would dig the irrigation ditch and then I could charge people the service of using my- or maybe I’ll charge people access to water and then I could essentially generate a return.
  • How do I do that? Well, what if I could borrow some of these people, right? These people have these units of goods and services called a gold coin.
  • If I could borrow some of their money and use it to pay people that will essentially do the goods and service or do the new project, then I’ll generate wealth.
  • Then I could share it with these people, maybe in the form of some type of interest.
  • Well, it’s very hard in a vacuum for these people to evaluate these projects.
  • Maybe these projects, they don’t require just part of the savings of one person, they require the savings of 1,000 people because it’s a large project.
  • It’s also hard for these people to evaluate who has a good project.
  • It’s hard for these people to evaluate who has savings.
  • That’s just going to make people come and rob me.
  • So I build this nice looking building that people would feel comfortable keeping their money in- and that could actually be safe for safekeeping.
  • Instead of having your money insecure in your backyard or your bed, why don’t you put your savings in this building and if you ever need it, you can come and get it? And on top of that, I’m going to pay you to keep your money with me.
  • This is a liability for me, right? Why is it a liability? Because I owe that to other people.
  • So what am I going to do with this $10 million of deposits? Well, I told people that they can take the money out any time.
  • If they put it in and then one day they can’t get their money back, they’re going to be very suspicious of me.
  • So at any given day, not everyone- hopefully not everyone’s- going to pull their money out or put their money in.
  • I need to keep some cash reserves in case people want their money back.
  • What I’d do with that $9 million is I loan it out to people who have really good projects or investments.
  • That’s an asset, right? I give that money to someone else.
  • I’m essentially borrowing $10 million, keeping $1 million aside, and paying out $9 million in loans.
  • So the natural question is, how am I making money? Well, these loans- I’m hopefully putting them to build irrigation ditches or build factories or do whatever, something that actually is an investment, that creates more value than it needed to start up.
  • So I’m getting 10%. And for their money, these people, not only do they get to keep their money in this nice, safe deposit, but I’m also paying them 5%. So how much money do I make in a year? Well, I’m making 10% on this $9 million.
  • Let’s say I pay another $100,000 for salaries and for security guards and all of that.
  • Of course, these people benefit because they get safekeeping for their accounts and their money is actually growing.

Week 4 – Role of Finance in Business – Part 2 > The Financial System – The Federal Reserve > Overview of the Federal Reserve

  • The Federal Reserve System or the “Fed” as it’s commonly called, is the central bank to the United States since its creation in 1913 the fed’s essential mission has remained unchanged to establish and maintain the public’s confidence in our nation’s monetary and banking system overtime that original mission has expanded to include responsibility for providing a stable healthy and growing economy but the confidence that exists today did not exist during much of our country’s early history.
  • Throughout much of the 1800’s almost any organization that wanted could print its own money as a result many states, banks, and even one New York Druggist did just that in fact that one time who over 30 thousand different varieties of currency in circulation Imagine the confusion not only with their multitude of currencies some were redeemable in gold and silver others were back by bombs issues by regional governments it was not unusual for people to lose faith both in the value of their currency into the entire financial system.
  • With many people trying to withdraw their deposits at once sometimes the banks didn’t have enough money on hand to pay their depositors then when the funds ran out the bank suspended payment temporarily and some even closed.
  • This Act created the Federal Reserve System to provide a safer and more stable monetary and banking system.
  • The Fed was designed to be a decentralized central bank the Fed consists of two primary parts a board of governors which guides most of the policy of the Fed, and 12 regional Federal Reserve banks and their branches, which are the operating arms that provide services to banks and the public in their region’s.
  • The 12 Reserve Bank’s and the local citizens on their boards of directors represent the private sector this structure provides accountability while avoiding centralized governmental control of banking and monetary policy.
  • The regional Reserve Bank’s work with the board of governors to establish and implement monetary policy for the nation they provide a variety of financial services and the responsible for supervision of banks bank holding companies of course all three rules are designed to fulfil the Fed’s main goal a stable economy characterized by higher employment and production steady growth overall stable prices no small feat.
  • In it’s supervisory role the Fed monitors banks and bank holding companies, that is banks that own or control 1 or more banks in the US operations over foreign banks.
  • Federal examiners look at such items as financial records the potential risk to the bank’s investments and they also check to see if the bank is following up with all applicable laws this supervision may be done either off-site using automated screening tools or on the banks promises In either case the bank receives a rating if a potential problems discovered the Fed will require that the bank take corrective action.
  • Whether its supervisory role or in its regulatory role the feds aim is once again to maintain a stable and healthy banking system capable of supporting economic growth from its beginning the Fed has provided numbers services to our country’s financial institutions the Fed plays a vital role in the nation’s payments system that is transferring funds or payments from one bank to another this is done either as cash or checks and electronic transfers because this role the Fed is often referred to as the bankers bank One of its roles is to act as the fiscal agent or as the bank for the United States maintains the US Treasuries accounts paychecks gonna Treasury facilitates the collection of federal taxes and is responsible for issuing servicing and redeeming treasury securities.
  • Have you ever thought about how much currency is actually in circulation? Believe me it’s a lot – almost half a trillion dollars including me about about currency used in other countries am it’s up to the Fed to make sure that there’s always enough money in circulation This means issue in currency and coin to banks working with banks to ensure that the currency that is in circulation is genuine and in good condition.
  • The Fed transfers funds from bank to bank in the former checks electronic payments when you write a check drawn on your bank account the business receiving the check will then deposit it in their bank account.
  • In order to have value, the funds from your bank have to be transferred to the bank receiving a check for the deposit.
  • The transfer of value from one bank account for the other bank account is called settlement.
  • Many businesses use direct deposit for their payroll payments to employees the federal government makes money payments through direct deposit including those to Social Security recipients and military personnel monetary policy Banking Supervision and financial services was again these are the three primary responsibilities that the Fed responsibilities to determine how the Fed helps to establish a strong economy.

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