Federal Reserve System

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The Federal Reserve headquarters in Washington, DC.

The Federal Reserve (also known as The Fed) is a central banking system that controls the monetary system of the United States, with virtually no accountability to the public. The Senate refuses to confirm for a position at the Fed anyone who is a critic or a genuine outsider. In practice, the Fed is a safety net for those connected with its club, as it arranged for the bailout of Long Term Capital Management in 1998[1] and then again for Wall Street banks a decade later.[2]

It was established by the Federal Reserve Act, which was passed by Congress and signed into law by President Woodrow Wilson in 1913. As it describes itself, "the Board is a federal government agency consisting of seven members appointed by the President of the United States and confirmed by the U.S. Senate."[3] The Federal Reserve is a system of private banks, twelve of which are designated as Federal Reserve Banks and have some features of public federal agencies. The Federal Reserve is headed by a Board of Governors and a Chairman. The current Chairman is Jerome Powell, as appointed by President Donald Trump. Prior chairmen have included Alan Greenspan, appointed by President Ronald Reagan.

One of the main jobs of the Federal Reserve is supposed to be to control inflation by adjusting the supply of money in the economy, while at the same time maintain the stability of the financial system and promote economic growth. This should be done primarily by setting the interest rates (the "discount rate") for money it lends to banks,[4] and also by buying and selling government bonds in order to influence banks' cash supply (called "open market operations") and setting the amount of money that banks must keep in reserve ("reserve requirements").[5] These three major operations are the basis of monetary policy, and are performed by the Fed to target a specific Federal Funds Rate that it believes will be low enough to ensure available credit and stimulate the economy, but high enough to prevent inflation. The Fed also has the responsibility of supervising and regulating banking institutions.[6]

In 2008 the Fed became a major player in many new ways, taking over several major banks (ostensibly to prevent total economic collapse) and making trillions of dollars in guarantees. See Financial Crisis of 2008.

Federal Reserve banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, St. Louis, Minneapolis, Dallas, and San Francisco.

Federal Reserve operations

Reserve requirements

A reserve requirement is that portion of a bank's daily receipts in deposits that must be held in reserve and not available for its daily lending activities. By tightening reserve requirements, less money is available for lending, and by loosening reserve requirements more money is available for business and consumer lending.[7] By far, most of these daily deposits come from businesses, and not individuals.

Discount rate

The discount or federal funds rate is the interest rate the federal reserve charges member banks for overnight lending. All federal and state chartered banks must meet their reserve requirement on a daily basis. At the end of a business day, some banks exceed their requirement while others fall short. So banks make overnight loans to each other ("interbank lending") at the federal funds rate, set by the Federal Reserve Board in its Open Market Meetings. However, job creation and economic growth will lead to a shortfall of money in circulation to meet new payrolls. As the amount of money in circulation to meet reserve requirements dries up, the Federal Reserve steps as the lender of last resort to supply new banking reserves to the network, i.e. expand the money supply. If the amount of reserves supplied to the network is excessive, the result is more money in circulation than necessary and inflation.

Open Market Operations

Open Market operations refer to the Federal reserve's buying and selling of U.S. Government Treasury securities (Treasury Notes and Bonds). By purchasing T-bills and bonds, the Fed purchases them with Federal Reserve Notes, or supplies more banking reserves to the network. By selling T-bills or bonds, the Fed drains excessive (or inflationary) banking reserves from the network. In this way the Fed attempts to control the money supply, the amount of money in circulation.

Effects of the Fed's Monetary Policy

The Fed made the Great Depression much, much worse by utterly failing in its primary responsibility. It simply did nothing, as hundreds and thousands of banks failed (see bank run). What it was supposed to do was lend them enough money to keep going!

Friedman and Schwartz argued that all this was due to the Fed's failure to carry out its assigned role as the lender of last resort. Rather than providing liquidity through loans, the Fed just watched as banks dropped like flies, seemingly oblivious to the effect this would have on the money supply.[8]

Criticism

Libertarians, such as Ron Paul, and many conservatives want to abolish the Federal Reserve. For 30 years Ron Paul has called for the secretive Federal Reserve bank to be audited.[9] Ron Paul's website declares "Since the Fed’s creation in 1913 the dollar has lost more than 96% of its value, and by recklessly inflating the money supply the Fed continues to distort interest rates and intentionally erodes the value of the dollar."[10]

However, conservatives are not united in their criticism: the prominent conservative commentator Vox Day, a member of Mensa, describes himself as a "loyal Federal Reserve supporter".[11]

Recent Literature

  • Epstein, Lita & Martin, Preston (2003). The Complete Idiot's Guide to the Federal Reserve. ISBN 0-02-864323-2. excerpt and text search
  • Greenspan, Alan. The Age of Turbulence: Adventures in a New World (2007), memoirs covering his chairmanship 1987-2006 excerpt and text search
  • Greider, William, Secrets of the Temple. (1987). ISBN 0-671-67556-7; nontechnical book explaining the structures, functions, and history of the Federal Reserve, focusing specifically on the tenure of Paul Volcker
  • Hafer, R. W. The Federal Reserve System: An Encyclopedia. (2005). 451 pp, 280 entries; ISBN 4-313-32839-0.
  • Meyer, Lawrence H. A Term at the Fed: An Insider's View. (2004) ISBN 0-06-054270-5; focuses on the period from 1996 to 2002, emphasizing Alan Greenspan's chairmanship during the Asian financial crisis, the stock market boom and the 9-11 Attacks
  • Treaster, Joseph B. Paul Volcker: The Making of a Financial Legend (2004), chairman 1979-87 online edition
  • Tuccille, Jerome. Alan Shrugged: The Life and Times of Alan Greenspan, the World's Most Powerful Banker (2002) online edition
  • Wells, Donald R. The Federal Reserve System: A History (2004)
  • Woodward, Bob. Maestro: Greenspan's Fed and the American Boom (2000) study of Greenspan in 1990s.

Historical Literature

  • Broz, J. Lawrence. The International Origins of the Federal Reserve System (1997). online edition
  • Carosso, Vincent P. "The Wall Street Trust from Pujo through Medina", Business History Review (1973) 47:421-37
  • Chandler, Lester V. American Monetary Policy, 1928-41. (1971).
  • Epstein, Gerald and Thomas Ferguson. "Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932." Journal of Economic History 44 (December 1984): 957–84. in JSTOR
  • Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960 (1963)
  • Hetzel, Robert L. The Monetary Policy of the Federal Reserve: A History (2008) from 1913 to 2007; excerpt and text search
  • Kubik, Paul J. , "Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes regarding Consumption and Consumer Credit." Journal of Economic Issues . 30#3. 1996. pp 829+.
  • Link, Arthur. Wilson: The New Freedom (1956) pp 199–240.
  • Livingston, James. Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913 (1986), Marxist approach to 1913 policy
  • Mayhew, Anne. "Ideology and the Great Depression: Monetary History Rewritten." Journal of Economic Issues 17 (June 1983): 353–60.
  • Meltzer, Allan H. A History of the Federal Reserve, Volume 1: 1913-1951 (2004) the standard scholarly history excerpt and text search
  • Roberts, Priscilla. "'Quis Custodiet Ipsos Custodes?' The Federal Reserve System's Founding Fathers and Allied Finances in the First World War", Business History Review (1998) 72: 585-603
  • Romer, Christina D. and David H. Romer. Choosing the Federal Reserve Chair: Lessons from History. The Journal of Economic Perspectives, Vol. 18, No. 1. (2004), pp. 129–162. (jstor)
  • Schull, Bernard. "The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence" (2005) ISBN 1-56720-624-7 online edition
  • Steindl, Frank G. Monetary Interpretations of the Great Depression. (1995).
  • West, Robert Craig. Banking Reform and the Federal Reserve, 1863-1923 (1977)
  • Wicker, Elmus R. "A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression", Journal of Economic History (1966) 26: 223–238, in JSTOR
  • Wicker, Elmus. Federal Reserve Monetary Policy, 1917-33. (1966).
  • Wells, Donald R. The Federal Reserve System: A History (2004)
  • Wicker, Elmus. The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed (2005).
  • Wood, John H. A History of Central Banking in Great Britain and the United States (2005)
  • Wueschner; Silvano A. Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917-1927 (1999)

References

  1. http://www.pseagles.com/Fed_Bailout_Requires_Full_Investigation
  2. https://www.bloomberg.com/opinion/articles/2014-09-23/biggest-losses-start-with-brilliance
  3. Board of Governors of the Federal Reserve System - Fedpoints - Federal Reserve Bank of New York
  4. The Fed's lending facility is called the "discount window"
  5. http://www.federalreserve.gov/pf/pdf/pf_3.pdf
  6. http://www.federalreserve.gov/generalinfo/mission/default.htm
  7. Typically, the reserve requirement is somewhere around 6%, but can be adjusted up or down. A radical upward adjustment in reserve requirements in a banking crisis can force some banks out of business, or cause banking mergers.
  8. The Great Depression According to Milton Friedman
  9. Audit the Federal Reserve
  10. Audit the Federal Reserve
  11. Vox Day's blog

External links