ECONOMICS
0115
SUPPLEMENTARY
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.