chapter 16. structure of central banks & the federal reserve system origins structure comparison...
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Chapter 16. Structure of Central Chapter 16. Structure of Central Banks & the Federal Reserve Banks & the Federal Reserve
SystemSystem
Chapter 16. Structure of Central Chapter 16. Structure of Central Banks & the Federal Reserve Banks & the Federal Reserve
SystemSystem
• Origins
• Structure
• Comparison to ECB
• Origins
• Structure
• Comparison to ECB
OriginsOriginsOriginsOrigins
• “the Fed”
• Federal Reserve Act 1913 response to panic of 1907
• obstacles fear of centralized power
• solution decentralized structure
• “the Fed”
• Federal Reserve Act 1913 response to panic of 1907
• obstacles fear of centralized power
• solution decentralized structure
StructureStructureStructureStructure
• 3 main parts: Federal Reserve Banks Board of Governors FOMC
• 3 main parts: Federal Reserve Banks Board of Governors FOMC
Federal Reserve BanksFederal Reserve BanksFederal Reserve BanksFederal Reserve Banks
• 12 regional banks
• serve the member banks in that district
-- all national banks
-- option for state banks
-- 33% of commercial banks
• 12 regional banks
• serve the member banks in that district
-- all national banks
-- option for state banks
-- 33% of commercial banks
• who controls district banks? member banks are part owners
-- 6% dividends
-- part of Board of directors other officers chosen by Board of
Governors
• who controls district banks? member banks are part owners
-- 6% dividends
-- part of Board of directors other officers chosen by Board of
Governors
• functions clear checks provide/destroy currency research regional economy
-- Beige Book economic education monetary policy approval of mergers, purchases
• FRBNY is most important district bank
• functions clear checks provide/destroy currency research regional economy
-- Beige Book economic education monetary policy approval of mergers, purchases
• FRBNY is most important district bank
1980 DIDMCA1980 DIDMCA1980 DIDMCA1980 DIDMCA
• all depository institutions keep reserves on deposit at district
bank have access to discount loans
• all depository institutions keep reserves on deposit at district
bank have access to discount loans
Board of GovernorsBoard of GovernorsBoard of GovernorsBoard of Governors
• 7 governors 14-yr. terms (nonrenewable) 1 chair
-- 4-year renewable term
-- Alan Greenspan (1987-2006)
-- Ben Bernanke (2006-
• 7 governors 14-yr. terms (nonrenewable) 1 chair
-- 4-year renewable term
-- Alan Greenspan (1987-2006)
-- Ben Bernanke (2006-
• Board helps set monetary policy on FOMC sets reserve requirement approves district discount loan
rates
• Board staff economists economic research collect data
• Board helps set monetary policy on FOMC sets reserve requirement approves district discount loan
rates
• Board staff economists economic research collect data
• Board enforces regulations permissible activities for banks Consumer protections stock margin requirements final say in bank mergers
• Board enforces regulations permissible activities for banks Consumer protections stock margin requirements final say in bank mergers
FOMCFOMCFOMCFOMC
• Federal Open Market Committee
• 12 members 7 governors FRBNY President 4 other district bank presidents
rotate
• Federal Open Market Committee
• 12 members 7 governors FRBNY President 4 other district bank presidents
rotate
• meet every 6 weeks assess condition of economy vote on monetary policy
-- announce decision later that day
(since 1996)
• meet every 6 weeks assess condition of economy vote on monetary policy
-- announce decision later that day
(since 1996)
• FOMC & monetary policy voting on federal funds rate target voting on open market operations
-- buying & selling of Treasury debt by the Fed
• FOMC & monetary policy voting on federal funds rate target voting on open market operations
-- buying & selling of Treasury debt by the Fed
Fed structure & realityFed structure & realityFed structure & realityFed structure & reality
• appears decentralized
• but power concentrated w/ Board of governors Chair
• appears decentralized
• but power concentrated w/ Board of governors Chair
Fed IndependenceFed IndependenceFed IndependenceFed Independence
• Fed has much more independence in decisions than other federal agencies
• Fed governors do NOT serve “at pleasure of the President”
• Fed decisions not subject to approval of President or Congress
• Fed has much more independence in decisions than other federal agencies
• Fed governors do NOT serve “at pleasure of the President”
• Fed decisions not subject to approval of President or Congress
sources of independencesources of independencesources of independencesources of independence
• structure Board of governors have long,
nonrenewable terms popularity of chairman w/ financial
sector
• structure Board of governors have long,
nonrenewable terms popularity of chairman w/ financial
sector
• financing Fed is self-financing
-- Treasury debt
-- discount loans
-- other services Does not depend on Congress for
funding
• financing Fed is self-financing
-- Treasury debt
-- discount loans
-- other services Does not depend on Congress for
funding
Fed independence is not Fed independence is not complete!complete!Fed independence is not Fed independence is not complete!complete!
• Congress has ultimate power to limit or eliminate Fed
• chairman testifies before Congress every 6 months
• Congress has ultimate power to limit or eliminate Fed
• chairman testifies before Congress every 6 months
Is independence good?Is independence good?Is independence good?Is independence good?
• common in industrialized countries
• but it is undemocratic• common in industrialized countries
• but it is undemocratic
ProsProsProsPros
• political goals often conflict with economic goals short term vs. long term goals Congress: re-election Fed: free to pursue unpopular
policies in short-run
-- price stability may require slower economic growth
• political goals often conflict with economic goals short term vs. long term goals Congress: re-election Fed: free to pursue unpopular
policies in short-run
-- price stability may require slower economic growth
example: 1981-82 recessionexample: 1981-82 recessionexample: 1981-82 recessionexample: 1981-82 recession
• Fed chair Paul Volcker slowed down economy to control inflation “Volcker Recession”: ’81-’82
• results of low inflation: 2 long expansions in 1980s, 1990s
• Fed chair Paul Volcker slowed down economy to control inflation “Volcker Recession”: ’81-’82
• results of low inflation: 2 long expansions in 1980s, 1990s
ConsConsConsCons
• Fed not accountable for mistakes stuck with bad governors
• independence is no guarantee of success Fed did not prevent bank failures
of Great Depression inflation of 1970s
• Fed not accountable for mistakes stuck with bad governors
• independence is no guarantee of success Fed did not prevent bank failures
of Great Depression inflation of 1970s
• independent Fed does not coordinate policy with Congress monetary vs. fiscal policy
• independent Fed does not coordinate policy with Congress monetary vs. fiscal policy
ECB: a comparisonECB: a comparisonECB: a comparisonECB: a comparison
• European Central Bank 1999 Central bank for monetary policy
of 12 euro countries A larger economy than U.S.
• European Central Bank 1999 Central bank for monetary policy
of 12 euro countries A larger economy than U.S.
ECB structureECB structureECB structureECB structure
• Executive board like Board of Gov
• National Central Banks (NCB) Like Federal Reserve Banks
• Governing Council Like FOMC
• Executive board like Board of Gov
• National Central Banks (NCB) Like Federal Reserve Banks
• Governing Council Like FOMC
Key differencesKey differencesKey differencesKey differences
• ECB does NOT regulate financial institutions
• ECB gets budget from NCB
• No voting on the Governing Council
• VERY independent Countries cannot change ECB
decisions
• ECB does NOT regulate financial institutions
• ECB gets budget from NCB
• No voting on the Governing Council
• VERY independent Countries cannot change ECB
decisions