The Nature and Creation of Money
Read these sections, "What is Money?" and "The Banking System and Money Creation", to examine money and its impact on real GDP and the price level. Specifically, learn about what money is and its three functions. Distinguish between the M1 and M2 definitions of money. Also, learn about the money creation process and role of banks in it in a fractional reserve banking system. You will revisit certain sections of the chapter later in this unit.
The Banking System and Money Creation
Case in Point: A Big Bank Goes Under
It was the darling of Wall
Street - it showed rapid growth and made big profits. Washington Mutual,
a savings and loan based in the state of Washington, was a relatively
small institution whose CEO, Kerry K. Killinger, had big plans. He
wanted to transform his little Seattle S&L into the Wal-Mart of
banks.
Mr. Killinger began pursuing a relatively straightforward
strategy. He acquired banks in large cities such as Chicago and Los
Angeles. He acquired banks up and down the east and west coasts. He
aggressively extended credit to low-income individuals and families -
credit cards, car loans, and mortgages. In making mortgage loans to
low-income families, WaMu, as the bank was known, quickly became very
profitable. But it was exposing itself to greater and greater risk,
according to the New York Times.
Housing prices in the United
States more than doubled between 1997 and 2007. During that time, loans
to even low-income households were profitable. But, as housing prices
began falling in 2007, banks such as WaMu began to experience losses as
homeowners began to walk away from houses whose values suddenly fell
below their outstanding mortgages. WaMu began losing money in 2007 as
housing prices began falling. The company had earned $3.6 billion in
2006, and swung to a loss of $67 million in 2007, according to the Puget
Sound Business Journal. Mr. Killinger was ousted by the board early in
September of 2008. The bank failed later that month. It was the biggest
bank failure in the history of the United States.
The Federal
Deposit Insurance Corporation (FDIC) had just rescued another bank,
IndyMac, which was only a tenth the size of WaMu, and would have done
the same for WaMu if it had not been able to find a company to purchase
it. But in this case, JPMorgan Chase agreed to take it over - its
deposits, bank branches, and its troubled asset portfolio. The
government and the Fed even negotiated the deal behind WaMu's back! The
then chief executive officer of the company, Alan H. Fishman, was
reportedly flying from New York to Seattle when the deal was finalized.
The
government was anxious to broker a deal that did not require use of the
FDIC's depleted funds following IndyMac's collapse. But it would have
done so if a buyer had not been found. As the FDIC reports on its Web
site: "Since the FDIC's creation in 1933, no depositor has ever lost
even one penny of FDIC-insured funds".Case in Point: A Big Bank Goes Under
It was the darling of Wall
Street - it showed rapid growth and made big profits. Washington Mutual,
a savings and loan based in the state of Washington, was a relatively
small institution whose CEO, Kerry K. Killinger, had big plans. He
wanted to transform his little Seattle S&L into the Wal-Mart of
banks.
Mr. Killinger began pursuing a relatively straightforward
strategy. He acquired banks in large cities such as Chicago and Los
Angeles. He acquired banks up and down the east and west coasts. He
aggressively extended credit to low-income individuals and families -
credit cards, car loans, and mortgages. In making mortgage loans to
low-income families, WaMu, as the bank was known, quickly became very
profitable. But it was exposing itself to greater and greater risk,
according to the New York Times.
Housing prices in the United
States more than doubled between 1997 and 2007. During that time, loans
to even low-income households were profitable. But, as housing prices
began falling in 2007, banks such as WaMu began to experience losses as
homeowners began to walk away from houses whose values suddenly fell
below their outstanding mortgages. WaMu began losing money in 2007 as
housing prices began falling. The company had earned $3.6 billion in
2006, and swung to a loss of $67 million in 2007, according to the Puget
Sound Business Journal. Mr. Killinger was ousted by the board early in
September of 2008. The bank failed later that month. It was the biggest
bank failure in the history of the United States.
The Federal
Deposit Insurance Corporation (FDIC) had just rescued another bank,
IndyMac, which was only a tenth the size of WaMu, and would have done
the same for WaMu if it had not been able to find a company to purchase
it. But in this case, JPMorgan Chase agreed to take it over - its
deposits, bank branches, and its troubled asset portfolio. The
government and the Fed even negotiated the deal behind WaMu's back! The
then chief executive officer of the company, Alan H. Fishman, was
reportedly flying from New York to Seattle when the deal was finalized.
The
government was anxious to broker a deal that did not require use of the
FDIC's depleted funds following IndyMac's collapse. But it would have
done so if a buyer had not been found. As the FDIC reports on its Web
site: "Since the FDIC's creation in 1933, no depositor has ever lost
even one penny of FDIC-insured funds".