Disadvantages Of Free Banking

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Register to read the introduction… ever had this system? (3 points) Why doesn’t the U.S. practice free banking today? (Briefly!) (5 points)
Free banking is a national banking system without a central bank. The US has had this system and was practiced from 1837-1864. Hamilton created the first bank in 1791 and was called Bank of America, but the first true bank wasn’t created until 1913 in response to the panic of 1907. The reason for the central bank is to mitigate bank failures and/or runs. As lender of last resort, they provide liquidity necessary to help mitigate bank failures/runs.
The price of credit is called __interest rate______. (3 points) Under all but the most extraordinary circumstances, this price is expected to be greater than zero because… (12 points)
People value the present over the future which is called preference. We value this more because the future is uncertain.
What is money? (5 points) Name and define the two most common measures of the money supply in the U.S. (10 points)
Money is the medium of exchange, store of value, unit of account. The two most common measures of the money supply are M1 and M2. M1 is currency, demand deposits, traveler’s checks. M2 is M1+ savings accounts, MM accounts, MM MF accounts, other time
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Securitization is when banks bundle up mortgages and other loans and sell them as securities (bonds) to investors. It allows lower tax burdens, lowers reserves requirements, lower capital requirements. A general timeline for this is in 1986, the tax reform act, stopped mortgage bonds from being double taxed. In 1994 JPM started CMBS, by 2000 more than 50% of commercial mortgages are CMBS, prior to 1980’s traditional banking was in place. The politicians allowed capital markets to meet the countries housing needs more effectively and efficiently, looks good for politicians if a lot of people are buying houses. Bankers expected return with lower risks, creates assymetric information, adverse selection and moral hazard, TBTF, Rating Agencies. Regulatory capture is when regulatee’s control the people/institutions that regulate them, an example is Lewis Ranieri hired Andy Furer because Furer opposed his legislation. Furer rewrote the bill to his liking under Ranieri and got it passed. Blackmail/Bribes. Regulatory arbitrage is strategic movement of assets to avoid regulatory requirements, or loophole mining. From the regulators perspectives ABS are less risky than underlying assets hence require less

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