There is probably no American institution as important, and yet so misunderstood, as the Federal Reserve Banking System, commonly known as, "The Fed."
It's a grave miscarriage of justice that during the Clinton administration Fed Chairman Alan Greenspan was eager to bask in the glow of the mainstream media and grab credit for the economic prosperity of those years. With sound administration fiscal policy and the now-forgotten budget surpluses accumulated during the Clinton years, Greenspan's job was easy. His manipulation of short-term interest rates was, at best, a minor contribution to prosperity of that era, even as he reveled in the "genius" attributed to him by the fawning mainstream media.
So "the maestro" bails out during the Bush years, just before the Great Recession for which he bears partial, if not major, responsibility. Part of the Fed's stated mission is to "maintain stability of the financial system and containing systemic risk that may arise in financial markets." Even as astute observers noted impending dangers, "the maestro" assured critics that markets would "self-correct." We saw how that turned out.
Enter Greenspan's successor, Ben Bernanke, who was handed the responsibility of doing whatever the Fed could do to assist in cleaning up the mess.
As the economy was in recession, the Fed became a whipping boy even though the disaster preceded Bernanke's arrival. Some grandstanding politicians went so far as to propose eliminating the Fed as an institution.
Eliminate it??? And replace it with what? Would anyone trust Congress to replace the Fed with a new institution to carry out the multiple functions for which the Federal Reserve System is responsible?
Let's review some basics of this important institution.
The Federal Reserve System was created to operate as the nation's central banking system. It is led by a seven-member board of governors and contains twelve district banks located in major cities. Included in its functions are many that may seem mundane and boring, but are essential to a smoothly functioning economy.
The district central banks provide services to private banks and depository institutions similar to what these same institutions provide for their customers. For example, district reserve banks hold cash reserves of local banks and depository institutions and make loans to them. They move currency and coin into and out of circulation and process millions of checks each day. They provide checking accounts for the U.S. Treasury, issue and redeem government securities, and act as fiscal agent for the U.S. government.
Another important function of the Federal Reserve System is to supervise and examine member banks for safety and soundness.
For carrying out these day-to-day activities, the system has been divided into the twelve districts. Northern and western Wisconsin is part of the 9th District headquartered in Minneapolis. Southern Wisconsin is part of the 7th District headquartered in Chicago.
Each district has a nine-member board of directors. Three members represent commercial banks in the district, and generally are bankers. Six members represent areas of the public; three of these are elected by member banks and the remaining three are appointed by the board of governors in Washington. Each district board appoints the president of its respective district.
While the above activities and functions are important, it is the role of the system in conducting the nation's monetary policy that, quite logically, generates the publicity and the controversy.
Monetary policy is responsible for influencing the flow of money and credit in the nation's economy. It is conducted by the 12-member Federal Open Market Committee (FOMC). The FOMC consists of the seven-member Board of Governors plus five of the 12 reserve district presidents. The members of the board of governors are appointed by the president of the United States, and confirmed by the Senate. They hold 14-year staggered terms. Five of the 12 district presidents serve on the FOMC on a rotating basis, with the exception of the New York district that has a permanent seat on the board because of its being the financial center of the nation.
It is the chair of the board of governors, who also serves as chair of the FOMC, that is the big wheel, the lightning rod, the target, and everything else, who presides over this sprawling structure. The president of the United States, with confirmation by the Senate, appoints this important individual, along with the vice chairman.
It is thus, amid much speculation and parlor guessing games, that Janet Yellen was recently appointed to succeed Ben Bernanke, who had succeeded Alan Greenspan. Most economists, myself included, agree that she is an excellent, well-qualified appointee.
Many observers assert that the Fed chairman is the most important and powerful financial person in the world. Under current circumstances, that is probably true. But it shouldn't be. If the Congress and the president could, or would, execute an appropriately counter-cyclical fiscal policy, the Fed and monetary policy would play only a secondary role. But with gridlock in Congress, the president's hands are tied. So with American fiscal policy therefore limited to "muddling through," monetary policy and the Fed get star billing.
Under the best of circumstances, correct monetary policy can be of marginal assistance, but incorrect monetary policy can do a lot of harm. Under terrible circumstances, such as the recent "Great Recession" and fiscal policy in gridlock, it is all left to the Fed with its limited tools of monetary policy. And with its limited tools and inability to do it alone, the Fed is going to be criticized for not performing miracles that it cannot possibly perform.
Next week: The Fed, and limitations of monetary policy.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
It's a grave miscarriage of justice that during the Clinton administration Fed Chairman Alan Greenspan was eager to bask in the glow of the mainstream media and grab credit for the economic prosperity of those years. With sound administration fiscal policy and the now-forgotten budget surpluses accumulated during the Clinton years, Greenspan's job was easy. His manipulation of short-term interest rates was, at best, a minor contribution to prosperity of that era, even as he reveled in the "genius" attributed to him by the fawning mainstream media.
So "the maestro" bails out during the Bush years, just before the Great Recession for which he bears partial, if not major, responsibility. Part of the Fed's stated mission is to "maintain stability of the financial system and containing systemic risk that may arise in financial markets." Even as astute observers noted impending dangers, "the maestro" assured critics that markets would "self-correct." We saw how that turned out.
Enter Greenspan's successor, Ben Bernanke, who was handed the responsibility of doing whatever the Fed could do to assist in cleaning up the mess.
As the economy was in recession, the Fed became a whipping boy even though the disaster preceded Bernanke's arrival. Some grandstanding politicians went so far as to propose eliminating the Fed as an institution.
Eliminate it??? And replace it with what? Would anyone trust Congress to replace the Fed with a new institution to carry out the multiple functions for which the Federal Reserve System is responsible?
Let's review some basics of this important institution.
The Federal Reserve System was created to operate as the nation's central banking system. It is led by a seven-member board of governors and contains twelve district banks located in major cities. Included in its functions are many that may seem mundane and boring, but are essential to a smoothly functioning economy.
The district central banks provide services to private banks and depository institutions similar to what these same institutions provide for their customers. For example, district reserve banks hold cash reserves of local banks and depository institutions and make loans to them. They move currency and coin into and out of circulation and process millions of checks each day. They provide checking accounts for the U.S. Treasury, issue and redeem government securities, and act as fiscal agent for the U.S. government.
Another important function of the Federal Reserve System is to supervise and examine member banks for safety and soundness.
For carrying out these day-to-day activities, the system has been divided into the twelve districts. Northern and western Wisconsin is part of the 9th District headquartered in Minneapolis. Southern Wisconsin is part of the 7th District headquartered in Chicago.
Each district has a nine-member board of directors. Three members represent commercial banks in the district, and generally are bankers. Six members represent areas of the public; three of these are elected by member banks and the remaining three are appointed by the board of governors in Washington. Each district board appoints the president of its respective district.
While the above activities and functions are important, it is the role of the system in conducting the nation's monetary policy that, quite logically, generates the publicity and the controversy.
Monetary policy is responsible for influencing the flow of money and credit in the nation's economy. It is conducted by the 12-member Federal Open Market Committee (FOMC). The FOMC consists of the seven-member Board of Governors plus five of the 12 reserve district presidents. The members of the board of governors are appointed by the president of the United States, and confirmed by the Senate. They hold 14-year staggered terms. Five of the 12 district presidents serve on the FOMC on a rotating basis, with the exception of the New York district that has a permanent seat on the board because of its being the financial center of the nation.
It is the chair of the board of governors, who also serves as chair of the FOMC, that is the big wheel, the lightning rod, the target, and everything else, who presides over this sprawling structure. The president of the United States, with confirmation by the Senate, appoints this important individual, along with the vice chairman.
It is thus, amid much speculation and parlor guessing games, that Janet Yellen was recently appointed to succeed Ben Bernanke, who had succeeded Alan Greenspan. Most economists, myself included, agree that she is an excellent, well-qualified appointee.
Many observers assert that the Fed chairman is the most important and powerful financial person in the world. Under current circumstances, that is probably true. But it shouldn't be. If the Congress and the president could, or would, execute an appropriately counter-cyclical fiscal policy, the Fed and monetary policy would play only a secondary role. But with gridlock in Congress, the president's hands are tied. So with American fiscal policy therefore limited to "muddling through," monetary policy and the Fed get star billing.
Under the best of circumstances, correct monetary policy can be of marginal assistance, but incorrect monetary policy can do a lot of harm. Under terrible circumstances, such as the recent "Great Recession" and fiscal policy in gridlock, it is all left to the Fed with its limited tools of monetary policy. And with its limited tools and inability to do it alone, the Fed is going to be criticized for not performing miracles that it cannot possibly perform.
Next week: The Fed, and limitations of monetary policy.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
