ECONOMICS 0281
SUPPLEMENTARY READINGS QUESTIONS-PART 3

01. 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. Does 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?

02. 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)? 

03. In Roger W. Garrison’s article “The Greenspan Fed in Perspective”:

 

     a. What is Regulation Q and what role did it play in Volker’s “monetarist” experiment between 1979 and 1982?

 

     b. Why was Regulation Q repealed? What were the consequences of repealing it?

 

     c. What is the Fed funds rate and why did Greenspan continue to target it?

 

     d. What happens if the Fed funds rate is set too high or too low?

 

     e. What Fed funds rate policy should be followed if inflation occurs? If unemployment rises? Explain.

 

     f. What is the equi-worry Fed funds rate? Is it the correct rate that would be set by the market (the natural rate)? Explain.

 

04. In Glasner's article "Why We Need A New Monetary Regime":

 

a. What is a monetary regime?

b. "Why...shouldn't the monetary authority be allowed to make the best use of all information about the state of the economy and make decisions accordingly?"

c. Explain what is meant by "the time inconsistency of optimal plans"?

d. Explain what kinds of actions will people take under a random walk monetary standard? Why aren't more contracts indexed to inflation?

e. What is the Lucas critique? What is its relevance to the use of an activist monetary policy?

05.  In White and Selgin’s article "The Evolution of a Free

     Banking System":

a. Explain what Selgin and White mean by a modern form of inside money.

b. Why are bank notes in more distant locations discounted (the holder gets less than the face value of the note)?

c. What are note brokers and why do they begin operations? Why do banks ultimately take over the note broker function?

d. What is "note-picking" or "note-duelling"? What is the outcome of a "note-duel"?

e. Why do clearinghouses emerge? What other purposes (other than efficient interbank settlements) can they serve? What is the difference between a private clearinghouse (which acts as a private lender of last resort) and a central bank?

f. Why might banks become insolvent and how can this be prevented? How might an option clause reduce or eliminate a banking panic?

06.  In Dowd's article "Automatic Stabilizing Mechanisms

     Under Free Banking":

 

a. Dowd argues that the commitment to convertibility is the central feature of a free banking system. Explain the implications of this commitment.

b. Why are note clearing mechanisms important? How do they arise?

c. How would free banks cope with the problems of potential illiquidity (i.e. their inability to liquidate their assets to meet depositors’ immediate demands for liquidity)?

d. How will government intervention in the form of monopoly of note issue and restrictions on bank organization affect the stability of a banking system? Explain.

07.  In Glasner"s article "Free Banking and Economic       

     Development":

 

a. How does self-interest motivate parties to an exchange to accept money which has no intrinsic value?

b. How can confidence in money be created and maintained? (Why is it unlikely that a private bank will issue irredeemable money?)

c. Why would a new fiat currency create a hyperinflationary environment for the former Eastern Bloc countries?

d. What does the author mean when he says (1) "All moneys are not equal" and (2) "monetary stability provides a kind of intangible infrastructural capital"?

e. Why does "free banking avoid the barrier that sovereign irresponsibility places in the way of creating monetary confidence"?

 

 8.  In Timberlake's article "Free Market Money in Coal-

     Mining Communities":

 

a. What is the difference between "legal tender" and "common tender"?

b. What factors stimulated the private production of money? What role did government play? What role did isolated communities play?

c. What is scrip? How did the use of scrip benefit both workers and their employers? Why did employers need to offer workers attractive employment terms?

d. In what kinds of environments did scrip usually appear? Why was the government relatively unconcerned about the existence of scrip.