FINC 409 Chapter 4 Key Terms Study Guide.

FINC 409 Chapter 4 Key Terms Study Guide. Identify some of the institutional participants in the mortgage markets. - CORRECT ANSWER The federal government has historically encouraged home ownership by supporting liquid markets for home mortgages. The Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) were created or formed to support the financial markets by purchasing home mortgages from banks and other institutions. Ginnie Mae and Fannie Mae issued mortgage-backed securities to fund their mortgage purchases and holdings. What actions did the Fed take to help avoid a financial system collapse in 2008-09? - CORRECT ANSWER After the housing price bubble burst in mid-2006, the values of mortgage loans and mortgage-backed securities declined rapidly. Mortgage default rates increased dramatically particularly for low quality, subprime mortgages. As holders of low quality mortgages, Fannie Mae and Freddie Mac suffered cash and liquidity crises. To avoid a meltdown, the Fed provided rescue funds in July, 2008 and the U.S. government assumed control of both firms in September, 2008. The Fed, sometimes with the help of the U.S. Treasury, also helped a number of financial institutions that were on the verge of failing to be merged with other firms. The Fed assisted in the acquisition of Bear Sterns by JP Morgan Chase and Company and helped in the sale of Merrill Lynch to Bank of America. In addition to direct intervention, the Fed engaged in quantitative easing actions to help avoid a financial system collapse in 2008 Describe the weaknesses of the national banking system that was in place prior to passage of the Federal Reserve Act of 1913. - CORRECT ANSWER The three weaknesses under the national banking system were: a) lack of an efficient national payments system, b) lace of an elastic or flexible money supply that could respond to changes in the demand for money, and c) no lending/borrowing mechanism to help alleviate liquidity problems when they occurred. Under the Federal Reserve Act, certain provisions of the National Banking Act were modified to permit greater flexibility of operations. The Federal Reserve Act was, in effect, superimposed on the National Banking Act. What functions and activities do central banks usually perform? - CORRECT ANSWER A central bank is a government-established organization responsible for supervising and regulating the banking system and for creating and regulating the money supply. Central banks typically play an important role in a country's payments system. It is also common for a central bank to lend money to its member banks, hold its own reserves, and be responsible for creating money. Describe the organizational structure of the Federal Reserve System in terms of its five major components. - CORRECT ANSWER The Fed system consists of five components: (1) member banks, (2) Federal Reserve District Banks, (3) Board of Governors, (4) Federal Open Market Committee, and (5) advisory committees. The Federal Reserve System is composed of 12 federal reserve districts, each district being served by a Federal Reserve Bank. Member banks own the stock issued by the Federal Reserve Banks. The Board of Governors in Washington, D.C. directs and coordinates the activities of the Federal Reserve Banks. The Federal Open Market Committee (FMOC) conducts open-market operations by buying and selling U.S. government securities. The Fed's three major advisory committees are: Federal Advisory Council, Consumer Advisory Council, and the Thrift Institutions Advisory Council.