Essay on Lessons Learned in Money and Banking

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Economic uncertainty has caused exaggerated criticism of the Federal Reserve. Money and Banking has deepened my understanding of the Federal Reserve and has helped me challenge those criticisms. The U.S. standard of living would drop if people lost faith in the safety of financial institutions. Frederic Mishkin makes the point in the text, The Economics of Money Banking, and Financial Markets (2010) that “Banks and other financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities.” (p.7). When people lose confidence in the economy this activity freezes or weakens, consequently, asset prices…show more content…
People often think of the FDIC's role in a financial panic. The FDIC insures bank deposits up to $250,000 per depositor. The text made the point that the FDIC's insurance only covers around 1% of bank deposits. The Fed on the other hand, as the lender-of-last-resort, prevents multiple bank failures and panics by providing reserves through their discount window when money is unavailable elsewhere. The lender of last resort role became particularly important after the terrorist attack on September 11. Within a few hours of the incident the Fed made the statement, “The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.” (p.386). After the worst terrorist attack in history, this statement provided banks with the certainty they needed that the Fed stood ready to step in and provide the liquidity needed in order to keep the financial system functioning. After the Dow dropped 7% this message was critical in saving the financial markets from freezing up and stopping the flow of financial activity. More recently, Bernanke through his role as lender-of-last-resort took bold measures to avoid the collapse of our financial systems during the Subprime Financial Crisis. The text mentions that he facilitated the purchase of Bear Stearns by J.P. Morgan through a non-recourse loan of $30 billion because Bear Stearns was so interconnected with other financial institutions that its failure could have seized up
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