That's a good question, Eric.
I'll try to explain it as best that I can and from what I have learned in my business studies.
The Federal Reserve is chartered by congress to under the Federal Reserve Act of 1913. That act was supported by a key Senator, then the Republican Senate leader, Nelson Aldrich. He was first opposed to a Central bank (Alexander Hamilton was the first to propose a Central Bank over a hundred years before), but as he studied the central banks in Europe, he was convinced that this would be the answer to most of the problems the US currency system had faced previously; albeit on one condition. That the bank be private, with the only government representation being on the Board of Governors, as the Board of Governors is appointed by the US President. However, the President cannot fire a boardmember (only the board can do that with a vote), and the boardmembers are not beholden to anyone in the government, because they serve longer terms than those who appoint them. They can act for themselves, just as a charter gives a corporate board of directors the ability to conduct business as the board sees fit. Both charters are fundamentally similar.
Even the stocks of the Federal Reserve are owned by the banks operating within a region of the system, and not the government. (There are 12 regions within the Fed system) Each Federal Reserve Bank is independently incorporated and has a 9-member board of directors, 6 of which are nominated by the member banks and 3 which are nominated by the Board of Governors.
The purpose of the Fed is to provide adequate currency, prevent bank runs, to monitor banks, and to manage "paper" (bonds, loans, mortgages, etc.). Its powers have expanded since being formed to balance interests of private banks and the government (which it can do because it is not 'government'), to provide financial services to deposit banks and the government, and to maintain and strengthen the US economy and financial system, among others.
The Fed also is the only organization, as chartered by congress, that can order Reserve Notes to be printed from the Treasury. In that regard as well, the US currency is not subject only to the government, but the people's control. The Federal Reserve Note, issued by Federal Reserve Banks replaced the once used United States Notes which were issued by the US Treasury. The government has to do much of it's financial transactions through the Fed's banking window. Because of this, the value of the currency is based only on the credit of the government, and the combined assets of the US economy.
Coins, on the other hand, are direct issue from the government, because they are directly obliged to the US Treasury.
To answer your question "If all the "government" (President and Congress) can do is advise and request things of the Federal Reserve but their decisions are their own, what stops the Fed from running things as they see fit?", the short answer is that the Fed does in fact run things as they see fit, and many times have gone in the face of both the government and wall street. In most cases, history has shown that the Fed's decision in those cases was probably one of the best ways to go about the problem.
However, recently it seems that some of the Fed Governors have neglected their duties. Here is a quote from their US Code on the Fed's responsibility in preventing asset bubbles (like the ones we have seen recently):
"Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System"
Twice in the last 15 years, and under two Chairmen and two US Presidents we have seen bubbles in assets like the ones described in the US code. Yet, it seems that the Fed has been reluctant to step in and make adjustments in the last decade. I'm not sure what has happened since the enormous, and somewhat secret, failure of Long Term Capital Management in 1998, but it seems that the Fed has been very hesitant to stem in and take control - beyond adjusting interest rates. Had the Fed not acted in bailing out LTC in 1998, a suprize economic collapse would have occurred, because of the unexpected breakdown in their trading algorithm would have caused worldwide losses at least in the hundreds of billions of dollars. (As a side note, the study which led to the algorithm they used had won the Nobel Prize in economics a year earlier). However, my opinion is that the Fed is now reluctant to step in because the LTC fiasco has made larger firms believe that a Fed bailout is inevitable if they fail, so they can now take on more risks, and the Fed doesn't want to appear like they are catering to that idea.
To be clear, taxpayers don't foot any of the Fed's bills such as bailouts until the full aftermath of the firm being bailed out has been accounted for. Most of the time, those huge bailout numbers are not as large when they hit the Fed's balance sheet because the companies are broken apart while under Fed protection and either sold, such as the case with Bear Stearns being sold to JPMorganChase in a weekend by the Fed's backing. Only when the losses of the company are so large that the liquidation or sale of company businesses and assets doesn't match up does the Fed debit money form it's tax-backed accounts.
That being said, I will answer the second part of your question. Jim Cramer is a great example of how to get the Fed's, especially the Chairman's, attention that their policies are not in line with the market pressures. Complain. He complained to media, threw a fit (which is now infamous) on live TV, and taught people how to "trade against the Fed", so to speak. Because the Fed is run by Capitalists, and not institutionalists and beaureaucrats, they monitor and take heed to market pressures. If you don't like the Fed policy, bet against them. Stockpile money, cause a credit crunch, stop consuming, stop trading or short sell stocks, bonds or mortgages which will drive down the prices (while potentially making you money in a bear market), decrease the value of the currency or start buying other currencies or commodities like gold, move your money from stocks to bonds, or across the seas to other markets, stop hireing at your business, etc. All of these things will cause the Fed to rethink their tactics. And as always, complain.
To sum up the idea that the Central banks around the world listen to the mass of complaints, the Central Bank in Europe told the press yesterday that they had heard too much complaining. They told the papers and the media that all of the complaints were based on fears that the media was purpetrating and creating, and asked that the media stop with the doomsday reports because people were getting overly scared about issues and speculations they shouldn't be so concerned about and that were not substantiated or true.
Hope that answers the question to some degree.
Tijs
--
--
Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com
Blogs:
http://phystrings.blogspot.com/
http://getoutofthedark.blogspot.com/
The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.
I'll try to explain it as best that I can and from what I have learned in my business studies.
The Federal Reserve is chartered by congress to under the Federal Reserve Act of 1913. That act was supported by a key Senator, then the Republican Senate leader, Nelson Aldrich. He was first opposed to a Central bank (Alexander Hamilton was the first to propose a Central Bank over a hundred years before), but as he studied the central banks in Europe, he was convinced that this would be the answer to most of the problems the US currency system had faced previously; albeit on one condition. That the bank be private, with the only government representation being on the Board of Governors, as the Board of Governors is appointed by the US President. However, the President cannot fire a boardmember (only the board can do that with a vote), and the boardmembers are not beholden to anyone in the government, because they serve longer terms than those who appoint them. They can act for themselves, just as a charter gives a corporate board of directors the ability to conduct business as the board sees fit. Both charters are fundamentally similar.
Even the stocks of the Federal Reserve are owned by the banks operating within a region of the system, and not the government. (There are 12 regions within the Fed system) Each Federal Reserve Bank is independently incorporated and has a 9-member board of directors, 6 of which are nominated by the member banks and 3 which are nominated by the Board of Governors.
The purpose of the Fed is to provide adequate currency, prevent bank runs, to monitor banks, and to manage "paper" (bonds, loans, mortgages, etc.). Its powers have expanded since being formed to balance interests of private banks and the government (which it can do because it is not 'government'), to provide financial services to deposit banks and the government, and to maintain and strengthen the US economy and financial system, among others.
The Fed also is the only organization, as chartered by congress, that can order Reserve Notes to be printed from the Treasury. In that regard as well, the US currency is not subject only to the government, but the people's control. The Federal Reserve Note, issued by Federal Reserve Banks replaced the once used United States Notes which were issued by the US Treasury. The government has to do much of it's financial transactions through the Fed's banking window. Because of this, the value of the currency is based only on the credit of the government, and the combined assets of the US economy.
Coins, on the other hand, are direct issue from the government, because they are directly obliged to the US Treasury.
To answer your question "If all the "government" (President and Congress) can do is advise and request things of the Federal Reserve but their decisions are their own, what stops the Fed from running things as they see fit?", the short answer is that the Fed does in fact run things as they see fit, and many times have gone in the face of both the government and wall street. In most cases, history has shown that the Fed's decision in those cases was probably one of the best ways to go about the problem.
However, recently it seems that some of the Fed Governors have neglected their duties. Here is a quote from their US Code on the Fed's responsibility in preventing asset bubbles (like the ones we have seen recently):
"Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System"
Twice in the last 15 years, and under two Chairmen and two US Presidents we have seen bubbles in assets like the ones described in the US code. Yet, it seems that the Fed has been reluctant to step in and make adjustments in the last decade. I'm not sure what has happened since the enormous, and somewhat secret, failure of Long Term Capital Management in 1998, but it seems that the Fed has been very hesitant to stem in and take control - beyond adjusting interest rates. Had the Fed not acted in bailing out LTC in 1998, a suprize economic collapse would have occurred, because of the unexpected breakdown in their trading algorithm would have caused worldwide losses at least in the hundreds of billions of dollars. (As a side note, the study which led to the algorithm they used had won the Nobel Prize in economics a year earlier). However, my opinion is that the Fed is now reluctant to step in because the LTC fiasco has made larger firms believe that a Fed bailout is inevitable if they fail, so they can now take on more risks, and the Fed doesn't want to appear like they are catering to that idea.
To be clear, taxpayers don't foot any of the Fed's bills such as bailouts until the full aftermath of the firm being bailed out has been accounted for. Most of the time, those huge bailout numbers are not as large when they hit the Fed's balance sheet because the companies are broken apart while under Fed protection and either sold, such as the case with Bear Stearns being sold to JPMorganChase in a weekend by the Fed's backing. Only when the losses of the company are so large that the liquidation or sale of company businesses and assets doesn't match up does the Fed debit money form it's tax-backed accounts.
That being said, I will answer the second part of your question. Jim Cramer is a great example of how to get the Fed's, especially the Chairman's, attention that their policies are not in line with the market pressures. Complain. He complained to media, threw a fit (which is now infamous) on live TV, and taught people how to "trade against the Fed", so to speak. Because the Fed is run by Capitalists, and not institutionalists and beaureaucrats, they monitor and take heed to market pressures. If you don't like the Fed policy, bet against them. Stockpile money, cause a credit crunch, stop consuming, stop trading or short sell stocks, bonds or mortgages which will drive down the prices (while potentially making you money in a bear market), decrease the value of the currency or start buying other currencies or commodities like gold, move your money from stocks to bonds, or across the seas to other markets, stop hireing at your business, etc. All of these things will cause the Fed to rethink their tactics. And as always, complain.
To sum up the idea that the Central banks around the world listen to the mass of complaints, the Central Bank in Europe told the press yesterday that they had heard too much complaining. They told the papers and the media that all of the complaints were based on fears that the media was purpetrating and creating, and asked that the media stop with the doomsday reports because people were getting overly scared about issues and speculations they shouldn't be so concerned about and that were not substantiated or true.
Hope that answers the question to some degree.
Tijs
On Wed, Sep 17, 2008 at 6:56 PM, Eric Limburg <dmx311@gmail.com> wrote:
Question:
You said,
If the Fed (or Federal Reserve/Central Bank) is a private, third party, institution not controlled by Congress or the President, how do We the People fix what they are doing? If all the "government" (President and Congress) can do is advise and request things of the Federal Reserve but their decisions are their own, what stops the Fed from running things as they see fit. I probably need an economics lesson, but it sure seems strange that our fiscal system is run by a third party, non-elected, committee. Who's responsible for all this madness. Everyone is blaming the government, but the ones making the decisions are independent of the government. But then we as tax payers are the one with the bill? Sounds like an insurance claim nightmare. Help me out here those of economic minds...
"We also need to remember that the Fed is not technically an arm of the government. They are a private institution that is not controlled by Congress or the President, but We the People. If we have an issue with the way things are being run at the Fed, then we as a people need to step in and fix it."
From: Tijs Limburg <tijis311@gmail.com>
Sent: Wednesday, September 17, 2008 1:04 PM
To: Limburg, Garth <Garth.Limburg@slcgov.com>; Eric Limburg <dmx311@gmail.com>; Nevin Limburg <Nevin.Limburg@wvc-ut.gov>; Brendon Charles <bcharles22@gmail.com>; Dupaix Steven <steve.dupaix@thomson.net>; Lizzie Dupaix <dyzylyzy@gmail.com>; Ronald Hess <rjoehess@gmail.com>
Subject: Bailouts - History Lesson
I agree with most of this article. However, there is a slight flaw in Andrew's logic which I have pointed out to him. The article would lead you to believe that Fed bailouts are something new. In fact they are not. Bailouts from the "Central Bank" could be argued to be the underlying premise of the Fed in the first place.Before the Fed was formed, the closest thing the US had to a central bank was J.P. Morgan bank. Mr. Morgan used his extensive financial arm and prowess on more than one occasion to bail out both the govenrment in 1895, and to stop the panic of 1907, among others. He even advocated the idea of a central bank, which Congress eventually followed. So in essence, J.P. Morgan could be looked at as the first 'Fed Chairman', who bailed out failing systems long before. Some have said Morgan advocated a central bank because he proved it was absolutely necessary in dire situations to have a central financial power that could step in at the right time and offer money, buy stocks, or create mergers. They also think that Morgan was tired of having this responsibility upon himself, as he was trying to run a banking business, not a regulatory agency of the treasury.We also need to remember that the Fed is not technically an arm of the government. They are a private institution that is not controlled by Congress or the President, but We the People. If we have an issue with the way things are being run at the Fed, then we as a people need to step in and fix it.While I don't think that every large failing company should be bailed out, and I am in a bit of disagreeance with helping AIG stay up, I don't think the bailouts we have seen so far are that dissimilar to tactics Morgan used over a century ago to save the US financial system from crisis.But the article is worth a read. Hopefully our regoinal banking system is firm enough that any widespread effects to not find their way to Salt Lake as quickly. Either way, keep an eye on the performance of the bank you go to. We may see a lot of small banks go under. In 1992, before the big turnaround we have seen in the last 15 years, 800 small or regoinal banks failed. We may see the same thing again.http://blogs.moneycentral.msn.com/topstocks/archive/2008/09/16/the-fed-is-not-our-sugardaddy.aspx?CommentPosted=true#commentmessage
--
Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com
Blogs:
http://phystrings.blogspot.com/
http://getoutofthedark.blogspot.com/
The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.
Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com
Blogs:
http://phystrings.blogspot.com/
http://getoutofthedark.blogspot.com/
The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com
Blogs:
http://phystrings.blogspot.com/
http://getoutofthedark.blogspot.com/
The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.
--
Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com
Blogs:
http://phystrings.blogspot.com/
http://getoutofthedark.blogspot.com/
The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.
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