Other Important Central Banks #Notebook

13.3 Other Important Central Banks #Notebook

The Maastricht Treaty created the European Central Bank (ECB), the central bank of the euro area.

The ECB was consciously modeled on the Fed and their structures are similar. However, the ECB is more decentralized than the Fed because the NCBs control their own budgets and conduct their own open market operations. 

The ECB does not regulate financial institutions, left the duty to each member's government. 

Other important central banks, the Bank of England, the Bank of Japan, and the Bank of Canada are unitary institutions with no districts. 

Despite the structural differences, the Bank of Japan implement monetary policy in ways very similar to the Fed and ECB.

Reference

Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation.  Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license. 

13.2 The Federal Reserve System’s Structure #Notebook

13.2 The Federal Reserve System’s Structure #Notebook

The Federal Reserve is composed of twelve district banks: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. 

The twelve district banks all have to do their duties.

Issue new Federal Reserve notes (FRNs) in place of worn currency.

Clear checks

Lend to banks within their districts.

Connect the Fed and the business community.

Collect data on regional business and economic conditions

Conduct monetary policy research

Evaluate bank merger and new activities applications

Examine bank holding companies and state-chartered member banks. 

The Fed’s headquarters is located in Washington, DC. Except for Boston and Philadelphia, each of those district banks also operates one or more branches. 

The districts don’t seem to be evenly balanced economically. Missouri is the only state with two federal reserve district banks. This was thought necessary to secure the votes of Missouri congressional representatives for the bill. 

Each Federal Reserve bank is owned by the commercial banks in its district, and they are chosen to join, own restricted shares in the Fed. 

The FRBNY (Federal Reserve Bank of New York)

The FRBNY (Federal Reserve Bank of New York) is the most important of the district banks because it also conducts open market operations, buying and selling government bonds on behalf of the Federal Reserve System, and doing International Settlements (BIS).

The FRBNY even safeguards tons of gold owned by the world’s major central banks. 

The FOMC is composed of the seven members of the Board of Governors. The FRBNY’s president is the only permanent member of the Federal Open Market Committee (FOMC).

The FOMC meets every six weeks or so to decide on monetary policy and open market operations.

Until recently, the Fed had only two other tools for implementing monetary policy, the discount rate that district banks lend directly to member banks and reserve requirements. 

The head of the Fed is appointed by the president of the United States, confirmed by the U.S. Senate.

The researchers provide the chairperson and the entire FOMC with new data, qualitative assessments of economic trends, and quantitative output from the latest and greatest macroeconomic models. 

Fed economists also help the district banks to investigate markets and competition conditions, and educational programs.

Reference

Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation.  Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license. 

13.1 America’s Central Banks #Notebook

13.1 America’s Central Banks #Notebook

Central banks generally charged with:

Controlling the money supply

Stabilizing the major prices

Improving economic output and employment

Regulating financial institutions

Stabilizing the economy

Providing a payments system

Central banks can be useful as an official systemwide lender of last resort, to increase the money supply or reduce the interest rates during a crisis period. 

Episodes in the history of the US convinced many Americans that the time had come to create a new central bank lest private financial institutions hold too much power. 

Financial Crisis in Greece and Ireland and What Is The Difference?

 Introduction

The financial crisis in Europe is also known as the European debt crisis or the European sovereign debt crisis. Many financial institutions, investors, or even the governments could not repay their debts. Many of the financial institutions collapse, and the governments in several European countries are running under tons of debts. The bond yield rose rapidly during that period and the fear was quickly spread. As the fear spreading, the bondholders tend to expect much more yield for the risk trade-off. After all, safety is very important while we consider our investment. 

The debt crisis began in 2008 and then spread to many European countries such as Portugal, Italy, Ireland, Greece, and Spain in 2009, and destroyed the confidence in European businesses, economies, and the credibility of the governments. Several Eurozone countries' bonds have been downgraded by rating agencies and became far more difficult to issue new bonds.

To restore the confidence, the International Monetary Fund (IMF) and the governments of European countries tried hard to prevent the collapse of the euro and financial contagion. And it was eventually controlled by making financial guarantees. However, the bonds are also built on guarantees, but they all default during the period. How can we know when does it will finally collapse again?

What Factors Led to The Present Financial Crisis in Greece and Ireland?

Greece 

Before the Global Financial Crisis of 2007-2008, the debt-to-GDP of Greece was pretty healthy and did not exceed 104%. As the financial crisis of 2008 hit the world's economy, many of the major industries of Greece like tourism suffered serious damage since tourism accounts for 18% of Greece’s GDP, and accounting for one-fifth of the workforce.(For a Sustainable Tourism Industry) That may explain why Greece has more international airports than most countries. 

As Greece's policymakers try to keep the economy functioning by government spending, the national debts increased accordingly. Since 2008, the debt to GDP of Greece was significantly soared. However, being a member of the Eurozone, Greece did not have autonomous monetary policy flexibility. But if Greece were to leave the euro, the economic and political consequences would be devastating. That means Greece has fewer tools to solve its own problems if they want to stay in the Eurozone. Moreover, Greece was hard to borrow money during this period since the markets have increased borrowing rates. Therefore, It was very difficult for Greece to finance its debt in early 2010 until the IMF's bailout. 

But the IMF's bailout was not for free, those loans are tied with several requirements and terms. Greece has to narrow the cost-competitiveness gap like wage reductions and head back to the original issue, the government spending. 

Ireland

Unlike Greece, the Irish sovereign debt crisis was not from government over-spending. It is caused by financing a property bubble. 

As we know that the Global Financial Crisis of 2007-2008 hit many countries around the world, of course, Ireland was not excluded. After the crisis, the unemployment rate in Ireland rose to 14% by 2010. Irish bank related industry had lost about billions of euros because of defaulted loans. These loans were borrowed mostly by property developers and homeowners to boom the property bubble and then burst around 2007. 

And no surprises, while the Irish government tries to save the economy and fix this issue, the national budget sank from surplus to deficit in 2010, the highest in the history of the eurozone. Moreover, a lot of depositors and bondholders cashed in during 2010 because with Ireland's credit rating falling rapidly, the guarantee was not credible enough. As we all learned how bankers making money by deposits, that kind of tremendous cash by depositors will be a devastating event.

Furthermore, yields on Irish Government debt rising rapidly was an inevitable path to go, because of the lack of confidence. Therefore, call out for help was a helpless choice. The Government went to seek assistance from the EU and IMF. Similar to Greece, money does not grow on trees, there are bailout agreements have to sign and compromise.

Summarise The Differences between The Greek and Irish

As the Global Financial Crisis of 2007-2008 hits, Greece's policymakers try to keep the economy functioning by government spending, and it is too much. 

Unlike Greece, the Irish sovereign debt crisis was not from government over-spending. It is caused by financing a property bubble. 

Finally, we are all humans, we always make mistakes. But why do we fall? So, we can learn to pick ourselves up. That's what we should do.

Reference

European debt crisis. (2020, October 02). Retrieved October 03, 2020, from https://en.wikipedia.org/wiki/European_debt_crisis

For a Sustainable Tourism Industry. (n.d.). Retrieved October 03, 2020, from https://www.mfa.gr/usa/en/about-greece/tourism/for-sustainable-tourism-industry.html