Central Banks

Business Ethics

History

• The period from approximately 1648 to1720 had the rise of money.

• This was the era of absolutism in France under Louis VIV

• The era of the centralization of the powers of Parliament in England.

• Colbert developed the theory of mercantilism.

History

• It was also during this time that the use of paper money by the state grew as a means for managing its finances. – 1661 the Bank of Stockholm was the first country in

Europe to introduce banknotes.– 1685 the French military introduced card money. – 1690 the Massachusetts Bay colony introduced paper

money– Between 1703 to 1713 the other colonies did as well,

mainly to meet military expenses.

History

• In 1694, the Bank of England was formed.

• In 1715, John Law’s created a note-issuing bank that seemed to create money out of thin air.

• The directors of the South Sea Company, in part wishing to imitate Law’s success as well as to become a rival to the Bank of England, created a similar company.

History

• It spawned speculation in a host of other companies.

• The ensuing crash led to the banning of all joint-stock companies without a royal charter, which in turn led to the restriction of commerce throughout the Eighteenth Century.

History

• Federal Reserve was created in 1913.

• The money supply was inflated by sixty percent and contributed to the stock market bubble and crash of 1929.

• Loans on securities increased $8 billion while bank loans increased from $24,121 to 35,711.

• A significant portion of the easy money found its way into the stock market, which increased nearly six hundred percent.

Greenspan

• Social security theft– 1983 needed to raise government revenues

without raising taxes– Social security funds used to balance the

budget

Greenspan

• Financial deregulation– Allows foreign governments to send funds into

US– Keeps interest rates down– Destroyed manufacturing base

Greenspan

• On October 19, 1987 Greenspan promised to inject liquidity into the market to prevent its collapse.

Greenspan

• He increased liquidity at every subsequent crisis. – October 1990, the United States banking

sector was in crisis – 1995-1996, the Mexican peso crisis and other

crises led the world’s bankers to increase liquidity again.

– There were further increases in liquidity in the Asian and Russian crises.

Greenspan

• the NASD increased one thousand one hundred and twenty-three percent

• the DOW three hundred and fifteen percent

• the S&P three hundred and fifty-three percent.

Greenspan

• Since the collapse of the market in 2000, the spigots have been wide open in an attempt to reflate the economy.

• From 2000 to 2001, there were eleven rate cuts by the Fed, which also increased the money supply by $ 1 trillion.

Greenspan

• Japan also inflated their money supply by $350 billion to support the US dollar.

The Real Estate Bubble

• Wages lag productivity

• Debt must make up the difference

Consequences

• Sacrifice savers to borrowers

• Reckless money policies– Asset inflation– Price inflation– Debt

Consequences

• it was his endless bailouts that caused folks to believe in the notion of a "Greenspan put.“

• Investors came to believe that investing had no risks.

Greenspan

• Regulation T, whereby margin requirements can be raised to reduce risk and change market psychology. (While raising margin requirements to even 100% may or may not have been sufficient to break the stock bubble, the Fed could have at least tried.

Greenspan

• The Fed could also ask Congress to resuscitate the old Regulation X. Part of the Defense Production Act of 1950, this regulation let the Fed set minimum downpayments and maximum mortgage-repayment periods for residential properties. The Fed gave up the authority a few years later.

Ben Bernake

• "The U.S. Government has a technology, called a printing press. ... The Fed could even implement what is essentially the classic textbook policy of dropping freshly printed money from a helicopter. ...

Ben Bernake

• "A little parable may prove useful ... suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost ... Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the ... printing press (or, today, its electronic equivalent) allows it to produce as many U.S. dollars as it wishes at essentially no cost."

The Future

• For the first time in history, we may have a Federal Reserve Chairman who seems to believe that running the money printing presses is a viable solution to our nation's economic problems and that a vastly devalued dollar is an acceptable result.