Unit 11: Money and Banking

What is Money?

Many people believe that money makes the world go around.  There are members in our society that are preoccupied with the making and accumulating of money. What is money?  Why does it matter so much to people?  What role does it play in the economy?  This section will look at the variety of ways that money is important to our economy.

BarterWhat makes money matter to an economy?  In short, the use of money simplifies market transactions.  In the past many societies were based on barter.  Barter is the direct exchange of one good or another.  But a barter system has problems.  Each producer must spend a great deal of time finding other producers to trade with, as well as have an understanding of the value of all the products in society.  The use of money prevents wasting time and allows for a society to be more productive.


The Three Functions of Money

The definition of money is anything that serves as a medium of exchange, unit of account, and a store of value.  That is why throughout history, money has taken the form of precious metals, furs, and even cigarettes.  Each of the three functions is discussed in more detail below.

Money as a Medium of Exchange.  If one of society’s goals is to expand the number of transactions, then the function of medium of exchange is vitally important.  Medium of exchange means that money is widely accepted in exchange for goods and services.  An example of this function is when someone exchanges $20 to buy food at a store.  It stimulates and increases trade by providing an easy method of exchange.  Since coins and currency are small and portable, money is an effective medium of exchange.  This useful feature makes bartering unnecessary.

Money as a Unit of Account.  This function of money provides a common measurement of the relative value of goods and services.   Without money, there is no common denominator.  How would a farmer know how many bushels of corn it would take to buy tools from a hardware store?  How would governments collect taxes?  Or for that matter, spend money on programs?

Money as a Store of Value.  A third function of money is its use as a store of value.  This means money has the ability to hold value over time.  This makes money a useful mechanism for transforming income in the present into future purchases. This function is valuable if we look at the barter system.  Imagine you are a farmer.  You have a crop to sell, let’s say apples.  How would you make future purchases?  Your apples might spoil and lose their value.  Not so with money.

Money is the most liquid form of wealth.  It takes time to convert gold, stock or real estate into something transferable.  Money can be spent right away in the marketplace.   Also, when it comes to money, governments want to control its supply.  The goal is to have money plentiful enough to meet ordinary needs, but not so plentiful so that it becomes worthless  (hyperinflation).

To test your knowledge of the functions of money, ask yourself, are credit cards money?

1.  The Yap People and Stone Money


The Money Supply in the United States

In the United States there are three components to the money supply.  They are M1, M2, and M3.  Each component is described in more detail below.





M1.    M1 is the most narrowly defined money supply.  M1 represents immediate purchasing power.  There is no need to borrow.  It consists of : 1)  currency (coins, paper money), 2) checkable deposits, ( total of checking account balances in financial institutions convertible to currency “on demand” by writing a check without advance notice), and 3) traveler’s checks.  This type of money is the most liquid.

M2.  M2 represents a broader view of the money supply.  It consists of M1 plus savings deposits and short time deposits of less than $100,000.  Savings accounts include such things as passbook savings accounts, money market mutual funds, and certificates of deposit (CD’s).

M3.  M3 represents M2 plus large time deposits of over $100,000.  These accounts are less liquid than M2 or M1.

1.  M3 Money Supply Tracking Back… Sort of



The Federal Reserve System

Most nations have a central bank.   The United States has a history of being somewhat uneasy with a central bank.  But the financial panic brought on by bank failures and millions of depositors losing their life savings during the first part of the twentieth century, created an atmosphere where people asked the government to provide more centralized control over banks.   In 1913, the Federal Reserve System was created.  It was hoped that in times of crisis, the Federal Reserve would act as a “lender of last resort”.

federalreservebuildingThe Federal Reserve System is a modified version of a central bank.  The Federal Reserve System, also known as the Fed for short,  is a privately managed, but government influenced institution.  The Fed assumes the role of a central bank by providing banking services to commercial banks, financial institutions, and the federal government.  Its primary job duty is the control of the nation’s money supply.  The president and Congress consult with the Fed to control the size of the money supply, which has the affect of influencing the economy’s performance.

There are many people out there that believe that the Federal Reserve is an “agency” of the federal government.  But that is not true at all.  The Federal Reserve is an unelected, unaccountable central banking cartel, and it has argued in federal court that it is “not an agency”  of the federal government and therefore not subject to the Freedom of Information Act.  The 12 regional Federal Reserve banks are organized “much like private corporations”, and they actually issue shares of stock   to the “member banks” that own them.  100 percent of the shareholders of the Federal Reserve are private banks.  The U.S. government owns zero shares. Many people also assume that the federal government “issues money”, but that is not true at all either.  Under our current system, what the federal government actually does is borrow money that the Federal Reserve creates out of thin air.

1.  An Explanation of the Federal Reserve by Stephen Colbert

2.  Anti-Banking Quotes

3.  Fed Bails Out Foreign Exchange Market to the Tune of $5.4 Trillion

4.  Top 5 US Banks Have Own Nearly Half of the Total Banking Assets

5.  Are Big Banks Criminal Enterprises?

6.  Bank Bailouts and Conflict of Interest With Federal Reserve

7.  Mind-Blowing Facts About Money

8.  Man Quits Job Because His $3.6 Million Bonus Was Not Big Enough

 9.  The Federal Reserve Explained in 7 Minutes

10.  German End the Fed Movement

11.  Why the Fed Doesn’t Care About the Poorest Half of Americans

12.  The Best Selling Monetary Policy Books Are All Anti-Fed

13.  The Financialization of the Economy Helps to Understand Growing Inequality (Graph)


The Structure of the Federal Reserve

The Federal Reserve is an independency agency of the federal government.  The president and Congress do not interfere with its day to day operations.  The Congress has some control over the Fed.  It oversees its operations and the Fed must report to Congress twice a year.  It also has the power to abolish the Fed.  The president also has power over the Fed because he appoints the Board of Governors.


The Board of Governors is made up of seven members.  Their job is to supervise and control the money supply.  The Federal Reserve System is made up of 12 districts.  Each district serve banks and other financial institutions.  The Federal Open Market Committee (FOMC) assists the Board of Governors.  It directs the buying and selling of U.S. government securities, which are major instruments for controlling the money supply.



The Functions of the Federal Reserve

The Federal Reserve has many functions.  Each function is described in more detail below.

Controlling the money supply.  This is the Fed’s most important function.  The process by which the Fed controls the nation’s money supply will be discussed in the next unit on monetary policy.

Clearing Checks.  The checks that individuals and businesses write each day are cleared through the 12 Federal Reserve district banks.

1.  Are Free Checking Accounts Going Away?

Supervise and Regulate Banks.  The Federal Reserve sets limits for bank loans, reviews the record books of banks, and approves bank mergers.  It also has established the Federal Deposit Insurance Corporation (FDIC).  The FDIC insures bank deposits up to $250,000.

Protect Consumers.  In 1968 the Federal Reserve created the Equal Credit Opportunity Act.  This act prohibits discrimination in providing credit based on race, sex, marital status, religion, or national origin.

Maintain Federal Government Checking Accounts.  The Federal Reserve is the bank for our federal government.


The Creation of Money Under the Theory of Fractional Reserve Banking

Banks have the ability to create money.  This process is made possible by the ability of banks to amplify new deposits by generating a spiral of new loans, and, in turn, deposits for new spending in the economy.

The miracle of banks making money begins with fractional reserve banking.  This system allows banks to keep only a percentage of their deposits on reserve as cash and deposits at the Fed.  If banks had to keep 100% of their cash on site, they would be unable to make loans.  Allowing banks to keep less than 100% on reserve allows them to make loans, which creates money in the economy.   Required reserves are the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed.   Since the Fed pays no interest on the reserves it holds, banks try to maximize profits by keeping only the minimum amount possible in required and excess reserve accounts.  As long as people have confidence in the banks, or more broadly, the FDIC, there is no need for banks to keep more than between 2 and 5% of their money in vault cash.

The required reserve ratio determines the minimum required reserves.  It represents the percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed.  Thus, if a bank has $50 million in deposits, and the reserve ratio is 10%, then it would have to keep $5 million in reserves at the bank.  The remaining $45 million could then be used for loans.  The Fed usually requires lower required reserve ratios for smaller banks.

The reserve requirement determines how much the banks can expose themselves- or in practice the public- to the risk of a bank run.  If the reserve requirement is low, the banking system has low reserves in relation to potential withdrawals of cash.  If customers of one bank get worried that they might not get their money back, customers of all other banks have reason to run to their bank before others have the same idea.

Excess reserves then are total reserves minus required reserves.  Excess reserves represents the money a bank can use to make loans. The interest collected on these loans is where banks make their money.


The Role of Credit, Banks, and the Economy

There are three different uses for credit. The first use of credit is that it can go into investments that enlarge a country’s production capacity and thus its ability to pay back the credit with interest.  This is where society can invest in infrastructure such as highways, dams, or the internet.  Secondly, it can go into consumption, raising demand for current production, but not directly raising the production potential. This is the type of credit that is extended to individuals to purchase household goods.  If this kind of credit is expanded, it tends to lead to inflation, as more purchasing power chases the same amount of goods and services.  The third type of credit is where the most potential for harm exists. This is where credit is extended to those who buy claims on existing assets, such as land, housing, stocks or bonds. This is where credit is given to wealthy individuals and financial institutions.  If this type of speculative credit is strongly expanded, it inflates the prices of these assets, enticing even more people to speculate on price gains with even more credit.  This creates a bubble , which feeds on itself, until it finally bursts.

The first use of credit to enlarge a country’s productive capacity, while in the interests of society, is often the one to which banks are the most hesitant to give.  They believe investing in the untested endeavors of companies to be too risky.  The most money and the quickest way to make it is in the third kind of credit, which is not in society’s interest to expand.  Recognizing this helps to understand the conflict that exists between the interests of the public and the interests of the financial sector when it comes to the creation of credit and the pursuit of profits.  Today most of the new money (credit) that is created is used for buying up existing assets, not for enhancing production capacity.

Private Banks and Money as Debt

As was discussed above, there have been, and continue to be, many people who are critics of private banking. Private banking can get both governments and citizens into a debt trap. With respect to governments,  a private central bank creates money when by printing it, or entering it as an accounting entry. The private bank then lends out the new money to the form of government bonds or debt.  The government then needs to pay the private central bank the money back with interest.  The same process holds true for citizens taking out loans at a commercial bank. Private commercial banks lend money out to its customers by creating accounting entries without the cost of a printing press (this is where people make the claim that money is created out of thin air).  It is important to remember that the U.S. government only creates the coins it uses- all other money is created as debt to private banks, be they either central banks or commercial banks.  Private banks create the principle in their accounting ledger, but they do not create the interest necessary to pay back the loans. This is where the trap comes in.  Governments and individuals must then take out more loans to pay the interest.  This leads to inflation and an increasing debt burden.  It also means that governments and individuals become debt slaves to private bankers. Because of the “money as debt” problem, there are calls both around the world and here in the United States to replace the private banking system with a public (government) run banking system which would have the effect of reducing debt levels for both individuals and governments. This is why private banks around the world work hard to make sure they are never replaced by public banks working for the interest of the people.

The big banks do not loan you money because they want to help you achieve “the American Dream”.  The bankers loan you money because it will make them wealthier.  For example, if you only make the minimum payment on a credit card each month, you will end up paying back several times as much money as you originally borrowed. In doing so, you become a lifelong customer (debt slave) to the banks.

1.  Money as Debt

2.  How a Few Wall Street Firms Manipulate the Entire Housing Market

3.  Does the Lord’s Prayer Really Mean:  Forgive Us Our Debts?

4.  The History of the Hazard Circular

5.  Student Debt Slavery

6.  Banks Don’t Create Money When They Make Loans Using Deposits. They Create New Money When They Make New Loans

7.   Research States That Banks Create Money Out of Thin Air

8.  Video That Confirms How Loans and Mortgages are Created Out of Thin Air by the Banks


The Power of International Banks

There are many people who believe that private banks have too much power in human society and that they are the true power behind governments.  The ultra-wealthy own virtually every major bank and every major corporation on the planet. They use a vast network of secret societies, think tanks and charitable organizations to advance their agendas and to keep their members in line. They control how we view the world through their ownership of the media and their dominance over our education system. They fund the campaigns of most of our politicians and they exert a tremendous amount of influence over international organizations such as the United Nations, the IMF, the World Bank and the WTO. When you step back and take a look at the big picture, there is little doubt about who runs the world. The ultra-wealthy elite often hide behind layers and layers of ownership, but the truth is that thanks to interlocking corporate relationships, the elite basically control almost every Fortune 500 corporation.  International bankers created the central banks of the world (including the Federal Reserve), and they use those central banks to get the governments of the world ensnared in endless cycles of debt  from which there is no escape. Government debt is a way to “legitimately” take money from all of us, transfer it to the government, and then transfer it into the pockets of the ultra-wealthy.  The center of international banking power is the Bank for International Settlements, located in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which are themselves private corporations.

Many people have started asking the question, “Are large, international banks to big to fail?”  In an article titled, “Gordon Gekko Reborn by Nouriel Roubini, writing for Project Syndicate, the author states:  “…Fourth, greed cannot be controlled by any appeal to morality and values. Greed has to be controlled by fear of loss, which derives from knowledge that the reckless institutions and agents will not be bailed out. The systematic bailouts of the latest crisis – however necessary to avoid a global meltdown – worsened this moral-hazard problem. Not only were “too big to fail” financial institutions bailed out, but the distortion has become worse as these institutions have become – via financial-sector consolidation – even bigger. If an institution is too big to fail, it is too big and should be broken up.”

As things stand, the banks are the permanent government of the country, whichever party is in power.

– Lord Skidelsky, House of Lords, UK Parliament, 31 March 2011)

“And the banks – hard to believe in a time when we’re facing a banking crisis that many of the banks created – are still the most powerful lobby on Capitol Hill. And they frankly own the place.” – Illinois Sen. Richard Durbin

In 2009 President Obama held a meeting with the CEO’s of the nation’s biggest banks. Instead of standing up for those who had been harmed most by the crisis—workers, minorities, and the poor – Obama sided unequivocally with those who had caused the meltdown. “My administration is the only thing between you and the pitchforks,” Obama said. “You guys have an acute public relations problem that’s turning into a political problem. And I want to help…I’m not here to go after you. I’m protecting you…. I’m going to shield you from congressional and public anger.”


Banks Are Behind Most Wars      Link 1    Link 2


Monetary Policy

janetyellenAs we have learned in the previous unit, the Federal Reserve’s most important job is to control the nation’s money supply.  In this section, we will look at how the Federal Reserve’s policies affect the nation’s money supply, and hence, our economic well being.

The Federal Reserve System’s most important function is to regulate the amount of money in the American economy.  It can accomplish this task by adjusting the reserves of the banking system.  Monetary policy is the term used to describe the Federal Reserves use of tools to influence the economy by shrinking or expanding the money supply.  The Fed has three main policy tools to achieve its objectives.

Open Market Operations

Open market operations refers to buying and selling of government securities, such as U.S. Treasury bills and bonds, by the Federal Reserve in the open market.  When the Fed buys securities it increases bank reserves.  Banks in turn, then increase their lending, thereby expanding the money supply.  What is happening here, is that the Fed is expanding the money supply by putting more money into the economy through the banks.  For example, if the Fed purchases $200 million worth of U.S. Treasury Bonds, that means banks have $200 million more dollars to use as loans.  On the other hand, when the Fed sells securities, it decreases banks reserves.  Banks then have less money to lend.  This has the effect of contracting the money supply.   For example, if the Fed buys back $100 million from banks, that means there is $100 million less dollars available to banks for loans. Open market operations are used more frequently than the other two tools.

The impact of  open market operations does not end with the Fed’s initial purchase or sale.  The money multiplier shows the total effect on the money supply of each dollar from open market operations.  As borrowed funds are deposited in a bank,  they are turned around and loaned to someone else, thereby increasing the money supply again.  This process can continue over and over.

Let’s see how the money multiplier works.  An individual deposits $10,000 in bank 1.  The required reserves is 10%.  Bank 1 needs to keep $1,000 on reserve, but has now seen its excess reserves increase by $9,000.   Another person comes in the bank and wants to borrow $9,000 to buy a used car.  They take the money and give it to the used car dealer.  The used car dealer takes the $9,000 and deposits it in bank 2.  Bank 2 now keeps 10% on reserve ($900) and has $8,100 in new excess reserves to make loans with.   Another person comes into bank 2 to borrow money for college tuition. They borrow $8,100.  They take the money and pay the college.  The college deposits the $8,100 in bank 3.  Bank 3 keeps 10% on reserve ($810).   Bank 3 now has $7,290 in new excess reserves to make loans with.    At each succeeding step, the sum of money loaned becomes smaller because each succeeding bank must hold a portion as required reserves.    The process ends when the last bank has nothing left to lend.


The Discount Rate

The discount rate refers to the interest rate the Fed charges on loans of reserves to commercial banks.  When the Fed decreases its discount rate, it makes it easier and more attractive to commercial banks to borrow money.  This means that banks will increase their lending, thereby increasing the amount of money in the economy.  The opposite is also true. If the Fed increases the discount rate, then banks have to pay a higher price for reserves. They will make fewer purchases from the Fed at higher rates.  This means they will have less money to borrow.  The economy, therefore, has less money in circulation.  In 2001 and 2002, the Federal Reserve, under Alan Greenspan, lowered the discount rate to levels not seen in forty years.  This was a windfall for consumers who could purchase high price items because the amount of interest they paid on their loans decreased. However, there is also a downside to low interest rates. Low interest rates undermine financial stability. Financial institutions promote irresponsible lending.  It increases risk taking by investors, which can lead to new “bubbles” which lead to economic recessions.


1.  Prime Rate History

Required Reserve Ratio

All banks are required to hold a minimum percentage of deposits as reserves. This minimum percentage is known as the required reserve ratio.   The ratio may vary between 3 and 10 percent.  If the Fed wants to increase the money supply, then it can decrease the reserve ratio.  For example, if the reserve ratio was 5%, and the Fed drops it to 3%, then banks have 2% more money to use as loans.  The opposite is also true.  If the Fed wants to contract or shrink the money supply, then it will increase the reserve ratio.  This means banks will have less money to use as loans.  The economy, therefore, has less money in circulation.  Let’s look at an example below.

Assume Bank A receives a deposit of $5,000. If the required reserve ratio is 10%, how much can Bank A loan out?   The answer would be $4,500.  This is because 10% of $5,000 is $500.  That means $500 must remain in the bank, leaving the rest to be used as loans.

Summary of the Fed’s Monetary Policy Options

Tighter Monetary Policy Looser Monetary Policy
Open market sale of securities Open market purchase of securities
Increase in discount rate Decrease in discount rate
Increase in reserve requirement Decrease in reserve requirement

Summary of the Connection Between the Money Supply and Interest Rates

As has been demonstrated above, all three monetary policy tools can have the affect of increasing or decreasing the money supply.  The change in the money supply has an affect on the interest rates.  An increase in the money supply will cause interest rates to decline, which causes an increase in consumer and business investment, and therefore, an increase in GDP.  Conversely, a decrease in the money supply will cause interest rates to rise, which will cause a decrease in consumer and business investment,  and finally, a decrease in GDP.

The Fed’s New Policy Following the Great Recession:  Quantitative Easing

Quantitative Easing is the practice of the Federal Reserve of creating new money in the hopes of creating new lending. It was a policy strongly supported by the former Chairman of the Federal Reserve, Ben Bernake. Quantitative easing (QE) is supposed to stimulate the economy by adding money to the money supply, thereby increasing demand for money. But so far, it hasn’t been working. Why not? Because as practiced, QE does not actually increase the circulating money supply. It merely cleans up the toxic balance sheets of banks.  As QE is practiced today, the money created on a computer screen never makes it into the real, producing economy. It goes directly into bank reserve accounts, and it stays there.  Reserves are used simply to clear checks between banks. They move from reserve account to another, but the total money in bank reserve accounts remains unchanged. Banks can lend their reserves to each other, but they cannot lend them to us.

In theory, quantitative easing should work in two ways. First, it injects more cash into banks, allowing them to lend more. And second, it lowers interest rates by making it cheaper to borrow money to buy a house. In practice, interest rates do drop. But it’s hard to figure out whether this translates into a boost in the actual economy. After all, low mortgage rates can only do so much if banks are scarred by the housing bubble and remain tightfisted about lending.

The Fed went through three rounds in  quantitative easing. The plan was for the Fed to buy $40B mortgage-backed bonds, per month, indefinitely. The banks that receive money from the Fed get to replace junky illiquid bonds with liquid Treasuries or cash.  This enables them to releverage and load up on more debt and assets. Suppose that the Fed pays $40 billion for mortgage bonds worth only $10 billion. That’s a $30 billion indirect bailout for the banks. When the Federal Reserve lends banks money at 0%, that is an indirect State subsidy.  The banks borrow at 0% and lend at higher rates.  The banks borrow at 0% and buy tangible assets such as stocks. Quantitative easing helps understand why the banks are doing so well during a period of economic crisis.  They get free money from the Fed and the use it to buy stocks.  This explains why the stock market has been doing so well. QE did not work for the average person in the United States. The money was used by banks and large corporations.  Almost none of it percolated down to the average person. As a policy QE was ended in October 2014.

Banks tend to discredit money expansion by governments as inflationary, but do not condemn money expansion produced by banks. The main difference, is that the proceeds of money printing by agents of the government go to the government (and by extension the people) and the proceeds of money creation by banks go to the banks.

When it comes to central banks (such as the Federal Reserve or the European Central Bank), most people believe they are part of the government but they are not.  Central banks are also banks- banks which seem to have the interest of the banking community closer to heart than the interest of the public.

1.  Bernancke Quote on Printing Money 



Modern Monetary Theory

After reading the information above on Quantitative Easing, it may appear that the Federal Reserve was creating as much money as it deemed necessary to solve an economic crisis. As discussed above, there are economists and others who believe that most money today is created out of “thin air” or on a computer screen by private, commercial banks and not through traditional fractional banking. There has been little criticism about the Federal Reserve creating trillions of dollars and using it to give to banks to buy back their toxic holdings and to keep them in business. The question therefore, is, how come it is theoretically acceptable to bail out banks for fraudulent and risky behavior, but not acceptable to bail out individuals or to promote the social good? This is where Modern Monetary Theory comes in.

Modern Monetary Theory (MMT) is a theory, which took off in the 1990’s,  states that governments, and not private banks, should create their own money supply.  Sovereign governments, through a central bank, will not face pure financial budget constraints because they can create money as needed to fund expenditures. The only monetary budget limitations are ecological constraints on what can be produced and consumed.  If the government overspends through the creation of deficits, then it creates surpluses for its citizens, as for every lender there must be a borrower. The number one criticism of MMT is that it could lead to inflation, where prices are increased through the creation of too much money.  Supporters say inflation can be controlled by governments imposing taxes to reduce excess money supply. Governments in the United States, Japan, and Australia are sovereign nations and can take advantage of MMT.  The Eurozone countries are not monetary sovereign nations who have their own currencies, and therefore can not put into practice Modern Monetary Theory principles.

Government politicians  are obsessed with balancing budgets, which according to MMT, doesn’t matter. Because of the over concern about running deficits, governments impose austerity (budget cutting) on its citizens, usually through the reduction of popular social programs like social security, pensions, health care expenditures, minimum wage requirements, tuition assistance, etc… which increases misery. For example, instead of cutting pensions and making life more difficult for senior citizens, governments should instead create the money necessary to adequately fund pensions since governments can not run out of money.  Advocates of MMT believe their theory is more reality based, because it relies on how money is actually created (out of thin air on computer screens) and not the restricted money supply of fractional reserve banking.

1)  Micheal Hudson Explains MMT and the Problem of Private Banks

2)  Did the Government (Through the Pentagon) Spend $21 Trillion That is Unaccountable?


Modern Changes in the U.S. Banking System

Prior to the 1980’s,  the banking system in the United States was more regulated, where financial institutions were more limited in the types of services they could offer.   In 1980,  Congress passed the Depository Institutions Deregulation and Monetary Control Act.   This act removed many of the distinctions between commercial banks and other financial institutions.   It extended the powers of the Federal Reserve to place reserve requirements on all depository institutions.  The act also allowed commercial banks, thrifts, money market mutual funds stock brokerage firms and retailers to offer a wide variety of banking services.   The Garn – St. Germain Act of 1982 allowed savings banks to now issue credit cards, make non residential real estate loans and commercial loans; actions previously only allowed to commercial banks.

In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed.  This  law permits U.S. banks for the first time, to establish branches in any state.   In 1999, the Financial Services Modernization Act was signed into law.  This act removed barriers and allowed banks, securities firms, and insurance companies to merge and sell each other’s products. This act ended the separation of commercial banks and investment banks that had existed since the passage of the Glass-Steagall Act during the Great Depression.  Commercial banks are usually conservative with their depositors money.  Investment banks, which generally serve the wealthy, take more risk. With the passage of the Financial Services Modernization Act, the risk taking mentality of investment banks worked its way into commercial banks.  This will be a contributing factor to the financial crisis that begins in 2007.

Many economists and others argue that these reforms were necessary and have made the banking community more competitive.  Consumers have benefited from this competition and have more services to choose from.  Other economists are more critical.  They believe the deregulation has created problems and led to a lack of trust and confidence in our nation’s financial institutions.  The most notable is the Savings and Loan Crisis of the late 1980’s and early 1990’s.

1.  Understanding Why There Has Not Been Any Federal Prosecutions For Bank Fraud

2.  7 of the Worst Scams and Ripoffs of Wall Street

3.  What Does the Cyprus Banking Scheme Mean?

4.  The Secret End Game Memo and Banking Conspiracy

5.  Big Banks Busted For Manipulating Foreign Exchange Markets, Precious Metals, and Every Other Market



The Financial Crisis of 2008 – ?

Beginning in the Fall of 2008, shocks to the financial and housing sectors caught up to the American and global economy.  Across the country and the world, consumer spending dropped and unemployment increased. Click on the Financial Crisis of 2008-? link below to get more information and background on the most severe shock to the global economy since the Great Depression of the 1930’s.

1.  The Financial Crisis of 2008 – ?

2.  12 Year Old Explains the Problem With Private Banks

3.  Banking Quotes

4.  Understanding the Credit Crisis (Video)

5.  The Daily Show Explains Wall Street Bonuses

6.  Citigroup Memo and Plutonomy

7.  Testimony Before the Financial Crisis Inquiry Committee

8.  Racial Predatory Loans Fueled U.S. Housing Crisis-Study

9.  “Goverment Sachs”

10.  Myths About How the Financial Crisis Happened

11.  The Global Banking Cartel and World War III?

12.  Federal Reserve Audit Reveals They Secretly Gave $16 Trillion To Banks in Bailout

13.  Bank of America Dumps $75 Trillion of Derivatives on US Taxpayers With Government Approval

14.  Map of Europe Showing Former Goldman Sachs Employees In the Governments

15.  The Financial Crisis For Beginners

16.  How Uniformed NYPD Officers Work for Banks

17.  Derivatives: The Unregulated Global Casino for Banks

18.  Goldman Sachs and Aluminum and Gas Trading

19.  Be Your Own Bank- Lend to the Poor of the World

20.  Citigroup’s Crime Wave   Link 1   Link 2

21.  Graph Showing Bank Mergers and How Banks Got To Be So Big

22.  Investors Suing Banks?

23.  After 6 Years as Attorney General and Not Prosecuting Banks, Eric Holder Returns to Them

24.  The $160 Billion Dollar Bank Fee

25.  Wells-Fargo Supervisor in Charge of “Massive Fraud” Leaves Bank With $125 Million Bonus

26.  Understanding Bank Bail in Video


The Personal Savings Rate and its Impact on the Economy

The Personal Savings Rate is a statistic that measures the amount of after-tax income left once household bills are paid.  As a society, Americans have been saving less.  In the 1980’s Americans saved around 10% of their income. by the mid- 1990’s, the savings rate fell to around 5%.  By 2007, the savings rate became negative for the first time since the Great Depression. A negative savings rate means that  American consumers are spending more than they’re taking home after taxes. What does this mean for our economy?  As always, economists are split on whether a low savings rate is good or bad.  Some economist worry over a low savings rate.  A low savings rate means people are not saving money for their retirement.  To prepare for retirement, people should build a nest egg and pay down their debt.  A lack of savings now will mean a reduction in spending later.  This lack of spending will push the economy into a recession. The main reason that the savings rate is so low is because of increasing home values.  The increase in home values convinced many Americans they no longer needed to save. Many also pulled cash out of their homes via home equity loans and mortgage refinancing to purchase expensive items like TV’s or cars- or to upgrade their home.

Other economists believe a low savings rate is not a cause for concern. They argue the personal savings figures are artificially low, since the numbers don’t include increases in assets such as equities and homes. Economists also note the savings rate doesn’t measure things like money going into bank accounts, 401(k)s and other retirement plans or mutual funds. The increase in these investments will provide additional money to be spent in the future.

Perhaps, the low savings rate will affect different segments of the economy differently.  Wealthy people are not as much at risk because their investments continue to generate income to be spent. But low to middle income “baby-boomers” may find their retirement nest egg insufficient for their needs.  If the housing market and the stock market continue to increase, then perhaps a low savings rate will not have so many negative effects.  But if either of these markets decline, the low personal savings rate could spell trouble for many Americans.


1.  Personal Savings Rate Near Record Low


Why are Home Sales So Important to Our Economy?

In June 2007, it was reported that sales of existing homes dropped by 3.8 percent.  The decline in home sales underscores the problems in housing, which, as of 2007,  is the worst slump in 16 years.  This was a top story in the news.  But why?

The housing industry is a vital component to the American economy.  In an earlier section of this unit, the discount rate was discussed.  Potential home buyers are very interested in the discount rate.  If the Fed lowers, the rate, it makes it less expensive to purchase a home.  Conversely, if the Fed raises the discount rate, it becomes more expensive to purchase a home.

But it is not just the “rate” that is important, it is also the ‘terms” of the loan.  In the past many home loans were “fixed” loans, where you paid the same amount each month for the duration of the loan. In recent years, “adjustable” rates have become more popular.  The banking industry offers a wide variety of loans where for  short period of time, you pay a low monthly mortgage, and then later, your payment increases.  But what happens if when “later” comes around, you don’t have the additional money to make your mortgage payment?  For many homeowners, this is a reality, and has contributed to the increase in recent years of home foreclosures.

When foreclosures increase, it creates a glut of homes on the market. This glut has the affect of dampening the construction of new homes. Fewer new homes being built means an  increase in the number of unemployed in the construction, lumber, and real estate industries.  It is hard for people to purchase homes when wages have been stagnant for so long for the bottom 80%.  Young, first time home buyers are having trouble saving for a down-payment because most of their paycheck goes to high rents and college debt.

There has been a great deal of talk about how the US economy has experienced a recovery.  Take a look at the graph below showing home ownership rates.  How does this graphs conflict with the message that the US economy is improving?





Parkin, Michael      2000  Economics (5th Edition)  New York:   Addison- Wesley

Slavin, Stephen L.      1999   Economics  (5th Edition)   New York:   Irwin McGraw-Hill

Taylor, John B.

2001 Economics.  Boston: Houghton Mifflin Company

Tregarthen, Timothy.

2000 Economics (2nd Edition) New York:  Worth Publishers

Tucker, Irvin B.         1995  Survey of Economics   New York:  West Publishing Company



  action Movies Relevant to This Unit

Below are a list of movies that exhibit economic concepts learned in this unit.

1.  Wall Street.  A young and impatient stockbroker is willing to do anything to get to the top, including trading on illegal inside information taken through a ruthless and greedy corporate raider who takes the youth under his wing.

2.  The Wolf of Wall Street. Based on the true story of Jordan Belfort, from his rise to a wealthy stock-broker living the high life to his fall involving crime, corruption and the federal government.

3.  The Big Short. Four outsiders in the world of high-finance who predicted the credit and housing bubble collapse of the mid-2000s decide to take on the big banks for their lack of foresight and greed.

books03  Books Relevant to This Unit

Below are a list of books that exhibit sociological concepts learned in this unit.

1.  Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free by Ellen Hodgson Brown

2.  The Ascent of Money: A Financial History of the World by Niall Ferguson



Copyright ©2002, 2007, 2014 Glenn Hoffarth All Rights Reserved


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