Overview
Introductory lecture for Money and Banking (BAFF 211). Defines financial economics, outlines course scope, key concepts, and textbooks. Presents structure: money, banking, central banking, interest rates, financial crises, and monetary policy.
Financial Economics and the Financial System
- Financial economics studies the financial system and its impact on the macroeconomy.
- Financial system components: financial institutions, financial markets, financial instruments/assets.
- Focus areas this semester: money and banking; next semester: financial markets and institutions.
- Banks as key institutions: commercial banks, central banks, investment banks (investment banks not covered here).
Macroeconomy Linkages
- Macroeconomy core topics: GDP (national output), employment, wages, government spending and taxes, imports and exports, interest rates.
- Financial system affects production, jobs, wages, fiscal activity, trade, and interest rates.
- Interest rates: most important price; price of capital; central to savings and investment.
Money, Credit, and Monetary Economics
- Monetary economics: how money affects production, wages, government spending, trade, and interest rates.
- Credit: borrowing from institutions (especially banks); influences asset prices and construction activity.
- Excess credit and money can create bubbles, inflation, and systemic risk.
Risks: Bubbles, Inflation, Crashes
- Real estate is a risky investment; credit-fueled booms raise prices and spur construction.
- Too much credit can crash banking systems; repeated historically across countries.
- Inflation: major problem from excess money; erodes purchasing power; harms the economy.
Course Textbooks and Materials
- Legacy text: “The Economics of Money, Banking, and Financial Markets” (Mishkin) noted as disorganized with errors.
- Primary text: “The Mystery of Banking” by Murray Rothbard (free PDF; ~190 pages; large type).
- Course uses Rothbard for money, banking, central banking; Mishkin for financial system overview, interest rates, crises, and monetary policy.
Course Structure and Timeline
- Part 1: Money (Ch. 1–5, pp. 1–74). Quiz 1 target: November 23.
- Part 2: Banking (Ch. 6–8, pp. 75–124). Quiz 2 after completion.
- Part 3: Central Banking (Ch. 9–12, pp. 125–190). Midterm likely after this part.
- Post-midterm (Mishkin): financial system intro, interest rates, financial crises, monetary policy, 2008 crisis.
Course Content Map
| Part | Focus | Chapters | Pages | Key Topics | Assessments |
|---|
| Money | Nature and role of money | 1–5 | 1–74 | Money definitions, functions | Quiz 1 (target Nov 23) |
| Banking | Loan and deposit banking | 6–8 | 75–124 | Loan banking, deposit banking, credit limits | Quiz 2 |
| Central Banking | Central bank and origins | 9–12 | 125–190 | Central bank support, bailouts, history | Midterm (most likely) |
| Financial System (Mishkin) | Overview | 2 | — | Institutions, markets, instruments | — |
| Interest Rates (Mishkin) | Return side of finance | 4–6 | — | Interest rate concepts, returns | — |
| Financial Crises (Mishkin) | Developed vs. emerging | 9–10 | — | Crises from excess money/credit | — |
| Monetary Policy (Mishkin) | Money supply control | 14–16 | — | Central bank tools, control/loss of control | — |
| 2008 Crisis (Mishkin) | Global financial crisis | — | — | Causes, effects, ongoing consequences | — |
Banking Topics Detail
- Loan banking: lending-focused banking; mechanisms and origins.
- Deposit banking: accepting deposits; mechanisms and origins.
- Commercial banking: merger of loan and deposit banking; core of modern banks.
- Limits on credit expansion: why banks cannot expand credit indefinitely; systemic constraints.
Central Banking Topics Detail
- Central bank role: enables further credit expansion; lender of last resort; bailouts.
- Origins: history, creation motives, and functions; why central banks were established.
Interest Rates and Finance Foundations
- Finance centers on risk and return; interest rate is the return on investment.
- Interest rates guide investment, savings, and capital allocation across the economy.
Financial Crises and 2008 Case
- Crises arise from too much money and credit; “hangover” after financial “drunkenness.”
- Developed and emerging economies both suffer severe consequences.
- Post-2008 low interest rates contributed to large real estate bubbles regionally; bursting has serious effects.
Practical Guidance for Students
- Download and bring Rothbard text; follow chapters during lectures.
- Printing chapters aids note-taking and alignment with board work.
- Course pace: roughly 1–2 hours per chapter; 2 weeks for each of first two parts; ~3 weeks for central banking.
Key Terms & Definitions
- Financial economics: study of how the financial system affects the macroeconomy.
- Financial system: institutions, markets, and instruments/assets that channel funds.
- Interest rate: price of capital; primary determinant of savings and investment.
- Monetary economics: study of how money and credit affect the economy.
- Credit: borrowed funds from institutions; fuels consumption and investment.
- Commercial banking: institutions that accept deposits and make loans.
- Central banking: institution managing money supply and supporting banks.
- Inflation: general rise in prices; reduces money’s purchasing power.
- Bubble: asset price surge driven by excess credit and speculation; unsustainable.
Action Items / Next Steps
- Download “The Mystery of Banking” (Rothbard) and open on device.
- Print Chapters 1–5 to follow lectures and annotate.
- Prepare for Quiz 1 by November 23 covering Chapters 1–5.
- Track course milestones: Quiz 2 after Chapters 6–8; midterm after Chapters 9–12.
- After midterm, be ready to switch to Mishkin sections on financial system, interest rates, crises, and monetary policy.