ECON 101 Lecture Notes - Lecture 5: Capital Accumulation, Disintermediation, Tax Law
26 May 2018
School
Department
Course
Professor
Economics 101
Lori Leachman
Part 5 • Lecture
• Excess reserves is critical for money supply
• Fed manipulates the excess reserves (thru rr, fed funds rate, disc rate)
• Regulation history:
o Glass steagall act - 1933
▪ Response to stock market crisis
▪ Federal reserve solidified
▪ Set environment for banking in US
▪ Separated commercial banks from investment banks
• Commercial banks: interacted with people
• Investment banks: invest on own account
▪ Regulation Q - interest rate ceiling, did not allow banks to offer interest on checking
deposits
o Eliminated G/S act and set in Gramm-leach bliley act - 1999
▪ Eliminated separation of investment banks and commercial banks
o Frank-Dodd act, 2010
▪ Separated investment banking and commercial banking to some degree
▪ Set regulation for lending... red-lining... etc
o Currently F-D act considered to be repealed certain elements.
• DRMCA 1980:
o Disintermediation: no new money coming in to grant loans and do lending at higher rates that
would be profitable
▪ inflation leads to increase in interest rate and regulation Q set a ceiling, making old
investments (low interest rates) unprofitable in the banking sector
o Deregulation monetary control act:
▪ Direct response to financial sector due to regulation Q
▪ Goal: to give fed better and more complete control of MS, improve profitability of
depository institutions
▪ EFFECTS:
• Brought thrifts under domain of the Fed
• Eliminated regulation Q
o maximum interest rate banks that could pay on deposits
▪ Reduce bank competition -> risk investments
o Prohibited banks from giving interest on checking acc deposits -
motivated money to move into markets
• Set uniform reserve requirements
• Began interstate banking
• Encouraged portfolio diversification for banks & thrifts
o Thrifts more business lending
o Banks more home mortgages lending
• Raising deposit insurance to 200k/acct now 250k
o Decrease risk -> encouraged more risky lending - more reward
▪ EFFECT:
• Led to Savings and Loans crisis in 1986/87
o Like financial crisis of 2007
▪ Different depository institutions invested in geographical and
asset classes that they were not familiar with
• Riskier investments
▪ Thrifts went into lending and large commercial real estate
projects
• These projects tanked in 2005-06, leading to crisis
• Graphs of monetary policy focus
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