ECONOMICS 0115
SUPPLEMENTARY READINGS QUESTIONS-PART 2

 

01.  In George Kaufman's article "Bank Runs":

 

a. Why does Kaufman think that a bank run is unlikely to CAUSE insolvency? (That is, cause a solvent bank to become insolvent.)

b. Why might runs on insolvent banks spillover to solvent banks? Why does this depend on what the running depositors do with their funds?

c. What does the evidence show about bank failures before deposit insurance?

d. How would a run on the banking system be detected?

02.  In Roger Leroy Miller and Daniel Benjamin's article "Short-Run Stabilization Policies--Fact or Fiction?":

 

a. Why do the lags in short-run stabilization policies lead critics of the Fed such as Milton Friedman to recommend the use of a monetary rule?

 

03.  In Roger Leroy Miller and Daniel Benjamin's article "The Political Business Cycle":

 

a. Explain Nordhaus' idea of a political business cycle and what evidence supports his ideas.

b. Explain Fair's idea of a political business cycle and what evidence supports his ideas.

c. Can politicians continually fool the public by expanding the economy right before an election? Can politicians be persuaded to do nothing about the economy or must they always appear to be doing something? What are Miller and Benjamin's answers? How might you answer those questions? Explain. Hint: What are rational expectations and how do they relate to these questions?

 

 

 

 

04.  In Roger Leroy Miller and Daniel Benjamin's article "Should the Fed be Controlled?":

 

a. Has the Fed stabilized or destabilized the economy? Does this record imply that Congress should have more control over the Fed? Briefly explain.

b. How would a monetary rule affect the Fed's ability to conduct countercyclical monetary policy?

c. Explain what NBER researchers found about the relation of central bank independence and the rate of inflation.

d. Why do some economists oppose a monetary rule?

05.  In Larry H. White’s article “The Financial Bailouts: See the Needle and the Damage Done”:

a. Why does White call the recent Fed lending activity a bailout?

b. In the past the Fed has used open market operations to expand or contract the money supply without showing favoritism to certain financial institutions. Do its recent lending activities have a similar result? Explain.

c. Why do the bailouts create uncertainty in the market and cause lending to freeze up? (Hint: See Anna Schwartz’s evaluation of the bailouts.)

d. Are financial institutions unregulated?

06.  In Jeffrey Friedman’s article “Capitalism Without Romance”:

a. In their eagerness to promote homeownership the Federal government pursued policies which caused a housing bubble (where housing prices rise continually). When the housing bubble burst and housing prices started to fall (because of an excess supply of housing) a world-wide banking collapse occurred. What caused this collapse?

b. Why did commercial bank lending freeze up? Why did this cause the Great Recession (Hint: Federal rules which mandate mark-to-market mean that any MBSs—mortgage backed securities—which were sold on the market at a lower price than their face value would determine the price of all MBS on the books of all financial institutions.)

c. What is the Recourse Rule for American banks?

d. Why did banks reduce their capital (increase their leverage) and why is this so risky? Why didn’t other financial institutions have a significant proportion of their assets in MBSs?

e. Why does regulation increase systemic risk? (Hint: What happens to risk perceptions in an unregulated market and how does regulation affect those perceptions?)

07. In David Howden’s article “Can the Fed Successfully Exit?”:

a. Why did reserves in the banking system increase dramatically in late 2008? Why did the Fed start paying interest on those reserves?

b. Why will paying interest on reserves prevent inflationary pressures from building up? Can the Fed continue this policy indefinitely?

c. One exit strategy for the Fed is to swap the “bad” assets on its balance sheet for the liquid reserves in the banking system. Why might this be a problem? (Hint: What is the quality of the assets that the Fed holds? Will it be able to obtain face value for them?)

d. What would be the lower bound estimate of inflation if the Fed does swap those assets for bank reserves?

e. When will the Fed attempt to unwind its asset position (make the swap of assets for bank reserves)? 

08.  In Steve Horwitz's article "Commercial Banking in a Free Society":

 

a. What happens when government monopolizes the currency? What happens when banks are free to issue their own brand of money? (Hint: Look at the overproduction and underproduction of money.)

b. What happens when government restricts the ability of a bank to establish branches in other states? What happens when banks are free to establish such branches? How does Glass-Steagall affect the ability of banks to diversify?

c. If banks can distinguish themselves from other banks because of their notes and the "brand recognition" these notes get, how does this affect the problem of banking panics? Would banks with their own notes need deposit insurance?

d. What can free banks do to reassure their customers that they are safe?

09.  In Cindy Kelly's article "Should Money Go Private?":

 

a. What effect does restrictions on branching have on the number of banks? What would removal of restrictions on branching do to the numbers of banks?

b. Why were private bank notes discounted? Did restrictions on branching have anything to do with this problem?

c. How would a private monetary system prevent a banking panic? (See lecture notes and Horwitz article.)

10.  In Lawrence H. White's article "Competing Currencies":

 

a. Will free banking systems be subject to periodic financial panics? What evidence does Prof. White cite to deal with this assertion?

b. Is the European Union a good idea from the point of view of free banking proponents? Explain.