Category Archives: Eric Tymoigne

By Eric Tymoigne

It may surprise you to know that the banking sector is one of the most regulated industries in the United States with a bank having to file regulatory documents with several agencies. These regulations determine how banks should and should not operate their business in terms of many aspects; from disclosure of information to potential customers, to means of determining creditworthiness of a potential client, to the amount of reserves to hold, to management issues, among others. For example the National Association of Mortgage Brokers noted in 2006

Mortgage brokers are governed by a host of federal laws and regulations. For example, mortgage brokers must comply with: the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Home Ownership and Equity Protection Act (HOEPA), the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), the Gramm-Leach-Bliley Act (GLBA), and the Federal Trade Commission Act (FTC Act), as well as fair lending and fair housing laws. Many of these statutes, coupled with their implementing regulations, provide substantive protection to borrowers who seek mortgage financing. These laws impose disclosure requirements on brokers, define high-cost loans, and contain anti-discrimination provisions. Additionally, mortgage brokers are under the oversight of the Department of Housing and Urban Development (HUD) and the Federal Trade Commission (FTC); and to the extent their promulgated laws apply to mortgage brokers, the Federal Reserve Board, the Internal Revenue Service, and the Department of Labor.

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By Eric Tymoigne

The US financial system is extremely complicated and this series shades light only on some corners of that system by focusing on the banking sector. Here is a broad picture of the US financial system (some things have changed since the last time I made this). Since the beginning of this M&B series, posts have emphasized the importance of balance sheet to get a solid understanding the mechanics at play in the financial sector. This post continues that trend.

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By Eric Tymoigne

Given that the concept of leverage will be used often in the upcoming posts, this post spends some time explaining what leverage is and some of its impacts on the balance sheet of any economic unit.

What is Leverage?

Leverage is the ability to acquire assets in an amount that is larger than what one’s own capital allows to buy. Say that an economic unit has a net worth of $100, that it has no debt and that the counterparty is $100 in cash (Figure 1). The balance sheet looks like this:

Figure 1. A balance sheet without leverage

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By Eric Tymoigne

For convenience, I have put the balance sheet of the Fed below. Post 2 examined the balance sheet and Post 3 provided important information about the meaning of reserves and other basic concepts and their relation to the balance sheet of the Fed. Now let us look at monetary-policy implementation.

What does the Fed do in terms of monetary policy and why? Continue reading →

By Eric Tymoigne

(A quick note: I noticed that the M&B posts get posted on other blogs. If you want me to respond to you, you should comment at NEP.)

MONETARY BASE AND THE BALANCE SHEET OF THE FED.

Post 2 examined the balance sheet of the central bank:

Now that we have an understanding of how the balance sheet of the Fed works, it is possible to go into the details of how the Fed operates in the economy in terms of monetary policy.

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By Eric Tymoigne

[Revised 1/18/16 – updated t-account images]

Post 1 reviewed basic balance-sheet mechanics. This post begins to apply them to the Federal Reserve System (Fed).

Balance Sheet of the Federal Reserve System

For analytical purpose, the balance sheet of the Fed can be presented as follows:

Figure 1. A Simplified Balance Sheet of the Federal Reserve System

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By Eric Tymoigne

I struggled a few years to get an M&B course together. It lacked coherency and students had difficulty to link the different parts of the course. A good part of the problem comes from the M&B textbooks that, besides having outdated presentations, are a disparate collection of chapters without a coherent core. So I gave up with textbooks and went my own way, and comprehension dramatically increased among my students.

The core of the financial system consists of financial documents and among them are balance sheets. Balance sheets provide the foundation upon which most of an M&B course can be taught: monetary creation by banks and the central bank, nature of money, financial crises, securitization, financial interdependencies, you name it, it has to do with one or several balance sheet(s). As Hyman P. Minsky used to note, if you cannot put your reasoning in terms of a balance sheet there is a problem in your logic.

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