Definition of Federal Reserve

Ekancone

I know that the Federal Reserve has numerous private banks on its board, but does that make the Fed a public or private institution? As far as i can see Bernanke is acting for the benefit of the overall public as opposed to bailing out dodgy lenders (which a public central bank would be expected to do), however the reps of these private banks remain and do possess some form of limited shares. So how much direct influence does the private sector have on the Fed?

silverharp

THe FED is a private banking cartel, it's not part of the US gov. There is a book on it called the Creature from Jeckell Island, I've been meaning to get it.

Ekancone

silverharp wrote:

THe FED is a private banking cartel, it's not part of the US gov. There is a book on it called the Creature from Jeckell Island, I've been meaning to get it.

Ok, can i get a non-conspiracy theory answer?

silverharp

In the appendix of this book (now in its 16th printing) Griffin had this to say, and he doesn’t pull his punches:

(A.) Structure and Function of the Federal Reserve System

The three main components of the Fed are: (1) the national Board of Governors, (2) the regional Reserve Banks, and (3) the Federal Open Market Committee. Lesser components include: (4) the commercial banks, which hold the stock, and (5) the advisory councils.

The function of the national Board of Governors is to determine the system’s monetary policy. The Board consists of seven members who are appointed by the President and confirmed by the Senate. Their terms of office are fourteen years and are staggered so that they do not coincide with the presidential term of office. The purpose of this is to insure that no single President can dominate Fed policy by stacking the Board with his appointments. One Board member is appointed as the Chairman for four years and another as Vice Chairman for four years. The Chairman controls the staff and is the single most powerful influence within the system.

Control is exercised by the Board and a handful of top staff employees. The Federal Reserve Act mandated that the President, when selecting Governors “shall have due regard to a fair representation of the financial, agricultural, industrial and commercial interest, and geographical divisions of the country.” This mandate is now almost completely ignored, and the men come primarily from the fields of banking and finance.

The function of the regional Reserve Banks is to hold cash reserves of the system, supply currency to member banks, clear checks, and act as fiscal agent for the government.

The twelve regional Reserve Banks are located in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis. They are corporations with stock held by the commercial banks, which are members of the system. Member banks elect the directors of the regional Reserve Banks of which they are a part. The larger banks hold more shares but only one vote in the selection of the Directors.

Within each regional-bank system there are nine Directors. The member banks elect three Class-A directors who represent the banking industry and three Class-B directors who represent the general public. The remaining three Class-C directors are appointed by the national Board. The Chairman and Vice Chairman of each regional Reserve Bank must be Class-C directors. The selection of President and other officers is subject to veto by the national Board of Governors. In this way, the national Board is able to exercise control over the regional branches of the system.

The function of the Federal Open Market Committee is to implement the monetary policy set by (the) National Board, although it exercises considerable autonomy in setting its own policy. It manipulates the money supply and interest rates primarily by purchasing or selling government securities---although it also accomplishes that through the purchase or sale of foreign currencies and securities of other governments as well. Money is created and interest rates go down when it purchase. Money is extinguished and interest rates go up when it sells. Policy is formulated on a daily basis. In fact, it is monitored by the minute and the Committee often intervenes in the market to affect immediate changes.

The Open Market Committee is composed of the national Board of Governors plus five of the twelve regional Presidents who serve on a rotating basis. The exception to this is the President of the New York regional Bank who is always on the Committee. Thus, once again, the System is firmly in control of the national Board with the President of the New York regional Bank being more powerful than the others.

Twenty-four bond dealers handle all sales of government securities. Government agencies cannot exchange with each other without going through dealers who earn commissions on each transaction.

Decisions are made at secret meetings. A brief report is release to the public six weeks later, but transcripts of the deliberations are destroyed. That policy was begun in 1970 when the Freedom-of-Information Act was passed. Not even the CIA enjoys such secrecy.

The function of the member banks is to conduct the nation’s banking business and to implement the System’s monetary policy in terms of putting money into (or drawing it out of) the system at the point of contact with individual or corporate borrowers.

This leads to the troublesome question of ownership. The federal government does not own any stock in the System. In that sense, the Fed is privately owned. That, however, is misleading in that it implies a typical private-ownership relationship in which the stockholders own and control. Nothing could be further from the truth. In this case, the stock carries no proprietary interest, cannot be sold or pledged as collateral, and does not carry ordinary voting rights. Each bank is entitled to but one vote regardless of the amount of stock it holds. In reality, the stock is not evidence of “ownership” but simply certificates showing how much operating capital each bank has put into the System. It is not a government agency and it is not a private corporation in the normal sense of the word. It is subject to political control yet, because of its tremendous power over politicians and the elective process; it has managed to remain independent of political oversight. Simply stated, it is a cartel, and its organization structure is uniquely structured to serve that end.

Ekancone

Again, anyone have a non-conspiracy theory answer?

silverharp

This is from a well known financial writer with a deflationary bias



Prechter: Why the Fed Will Not Stop Deflation


Excerpted from The Latest Elliott Wave Theorist
August 26, 2007 | Robert Prechter
Reprinted with permission

We hear it every day: "What about the Fed?" The vast majority of investors and commentators seem confident that the Fed's machinations make a stock market collapse impossible. Every hour or so one can read or hear another comment along these lines: "the Fed will provide liquidity," "the Fed is injecting money into the system," "the Fed will be forced to bail out homeowners, homebuilders, mortgage companies and banks," "the Fed has no choice but to inflate," "the government cannot allow deflation," "the Fed will print money to stave off deflation" and any number of like statements.

None of them is true.

The Fed is not forced to do anything; the Fed has not been injecting money; the Fed does have choices; the government does not control deflationary forces; and the Fed will not print money unless and until it changes its long-standing policies and decides to destroy itself.

A perfect example of one of these fallacies recently exposed is the widespread report in August that the Fed had "injected" billions of dollars worth of "money" into the "system" by "buying" "sub-prime mortgages."

In fact, all it did was offer to stave off the immediate illegality of many banks' operations by lending money against the collateral of guaranteed mortgages, but only temporarily under contracts that oblige the banks to buy them back within 1 to 30 days. The typical duration is 3 days. Observe three important things:

1. The Fed did not give out money; it offered a temporary, collateralized loan.
2. The Fed did not inject liquidity; it offered it.
3. The Fed did not lend against worthless sub-prime mortgages; it lent against valuable mortgages issued by Fannie Mae (the Federal National Mortgage Association), Ginnie Mae (the Government National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation). The New York Fed is also accepting "investment quality" commercial paper, which means highly liquid, valuable IOUs, not junk

As a result:

1. The Fed took almost no risk in the transactions.
2. The net liquidity it provided -- after the repo agreements close -- is zero.
3. The financial system is still choking on bad loans.
4. Banks and other lending institutions must sell other assets to raise cash to buy back their mortgages from the Fed.

These points are crucial to a proper understanding of the situation. The Fed is doing nothing akin to what most of the media claims; like McDonald's, it is selling not so much sustenance as time, in this case time for banks to divest themselves of some assets. But in the Fed's case, that's all it's selling; you don't get any food in the bargain.

As I have said before, the Fed is a bank. It has private owners. The owners do not want to see their enterprise destroyed. Although Bernanke probably received distress calls from mortgage lenders, he probably also got calls from the Fed's owners saying, "Don't you dare buy any of that crap and put it in our long-term portfolio." The Fed's owners are smart. They exploit the banking system without taking on any of the risks. They let member banks make mortgages and lend to consumers, but they don't do so themselves.

In the early 1930s, as markets fell and the economy collapsed, the Fed offered loans only on the most pristine debt. Its standards have fallen a bit, but not by much. Today it will still lend only on highly reliable IOUs, not junk. And it doesn't even want to own most of those; it takes them on only temporarily as part of a short-term repurchase agreement.

The Fed's power derives from the value of its holdings, which are primarily Treasury bonds, which provide backing for the value of the Fed's notes. What would a Federal Reserve Note be worth if it were backed by sub-prime mortgages? The real value of U.S. Treasury debt is precarious enough as it is, but at least it has the taxing power of the government behind it. But if the Fed bought up the entire supply of sub-prime mortgages, its notes would lose value accordingly. So will the Fed bail out mortgage companies, as the optimists seem to think? No, it won't. Those who think the Fed will buy up junk with cash delivered by helicopter are dreaming.

Ironically, of course, the Federal Reserve System and the federal government-both directly and via creations such as privileged mortgage companies and the FDIC-have fostered all the lending and the junk debt that resulted. But these entities want only to benefit from the process, not suffer from it. As we will see throughout the bear market and into the depression, the Fed is self-interested and will not brook losses in its portfolio. Those who own the bad loans, and perhaps some foolish government entities that try to "save" them, will take losses, but the Fed won't. ...

What must the banks do with their "grace period" of a few days that the Fed's repo agreements provide? They have to raise the cash to buy back the IOUs that the Fed agreed to hold for them. How does a bank raise money? By selling assets. Thus begins the downward spiral: Contracting credit causes asset sales, which cause collateral values to fall, which causes lenders to curtail lending, thus contracting overall credit, which causes assets sales, and so it goes. Thus, the Fed is not staving off deflation; at best, it may have helped -- momentarily -- to make it more orderly. But the selling of assets has begun regardless.

Ekancone

Ok, one last time. Any non-conspiracy theory answers?

superhooper

daithifleming wrote:

Ok, one last time. Any non-conspiracy theory answers?

Daithi-Whats so conspiratorial about Silver's response. Seems factual to me.

Ekancone

silverharp wrote:

THe FED is a private banking cartel, it's not part of the US gov. There is a book on it called the Creature from Jeckell Island, I've been meaning to get it.

This statement. Im giving up on this thread, conspiracy theorists are ****ing idiots man.

silverharp

Forgetting the “conspiracy angle” what did you make of the 50bp move last week. Imo this was a bail out of the lenders and wall street as opposed to protecting the purchasing power of the money and thus the interests of the public. The cut will not stop house prices falling in the US and it will create more inflation for the general public. So who gained/ who suffered?

superhooper

Have to agree with you. Purely related to protecting banking system. But isn't that the basis of ensuring stability. I believe there are going to be some serious rocky patches ahead for the US over the next few months particularly and indeed over the next few years.

dermot_sheehan

Very good article here: http://en.wikipedia.org/wiki/Federal_Reserve_System

It's an institution where the board is appointed by the president on the advice and consent of the senate but each member bank is in theory "owned" by the member credit institutions. The shares they own in it are not transferable but pay dividends. This basically compensates them for the reserves they are required to deposit with the reserve bank that no interest is paid on.

Minder

silverharp wrote: »

Prechter: Why the Fed Will Not Stop Deflation

Excerpted from The Latest Elliott Wave Theorist
August 26, 2007 | Robert Prechter
Reprinted with permission

We hear it every day: "What about the Fed?" The vast majority of investors and commentators seem confident that the Fed's machinations make a stock market collapse impossible. Every hour or so one can read or hear another comment along these lines: "the Fed will provide liquidity," "the Fed is injecting money into the system," "the Fed will be forced to bail out homeowners, homebuilders, mortgage companies and banks," "the Fed has no choice but to inflate," "the government cannot allow deflation," "the Fed will print money to stave off deflation" and any number of like statements.

None of them is true.

Apparently Prechter doesn't know all the answers

The Fed Bought What?
By John Paul Koning
Posted on 8/13/2007

The US Federal Reserve injected $38 billion dollars into the economy via temporary open market operations this Friday. This is the largest number of temporary repurchase agreements (specifically, one business day repos) entered into by the Fed since September 11, 2001. Back in 2001, Fed purchases of treasuries exceeded $30 billion for the four consecutive days after the collapse of the World Trade Towers, total temporary injections into the banking system amounting to a whopping $295 billion.

What is significant about Friday's repurchase agreements is not so much their size, but the securities that the Fed exchanged for money: mortgage-backed securities (MBS). Indeed, the entire $38 billion dollar injection went to MBS purchases, the largest open market purchase of this asset type ever conducted by the Fed, smashing the previous record of $8.6 billion set back in September of 2005. See chart, above.[1]

The type of mortgage-backed securities the Fed bought are created when bundles of individual mortgages originated by commercial banks are guaranteed by quasi-governmental agencies such as the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae), then split apart and sold to investors. Homeowners pay interest on these mortgages, interest payments flowing through to the final holders of MBS.

For those who have gone through the Economics 101 treatment of the Fed, the sudden appearance of MBS in Fed open market operations might seem odd. Professors have always taught that when the Fed expanded the money supply it did so by buying government bonds and bills. Indeed back in September 2001, the Fed provided liquidity by buying what it has always traditionally bought; treasury securities. So why is the Fed buying MBS now, and when did it acquire the authority to do so?

First a note on how open market purchases work. The Fed uses what are called open market operations to control the Federal Funds rate, the rate at which large commercial banks lend cash to each other overnight to fulfil their reserve requirements to the Fed. The Fed sets a target for the federal funds rate and defends it by either withdrawing or injecting money according to the requirements of commercial banks. It injects by buying securities from the banks with freshly created checking deposits, or money. This injection increases the reserves commercial banks hold, allowing these banks to expand credit to businesses and consumers. The Fed withdraws money by selling securities to commercial banks and receiving money as payment, thereby reducing reserves and removing credit from the system.

The Fed conducts both temporary open market operations and permanent ones. Permanent, or outright operations, inject cash and remove securities from the banking system forever. The Fed keeps the securities it has acquired outright in the System Open Market Account, aptly initialed SOMA (in Aldous Huxley's Brave New World, the drug soma is produced to keep citizens in a steady state of happiness, much like the Fed's SOMA). Temporary operations, the ones entered into this Friday, involve 1–14 day repurchase or reverse repurchase agreements whereby the Fed purchases (or sells) securities in return for cash with an agreement that the commercial bank on the other side of the deal will buy back (or sell back) the securities after a period of days.

Temporary reverse repurchase operations, the short-term withdrawal of money from the banking system, are rare. The Fed has only engaged in 16 reverse repos since late 2000, versus 1247 repurchases. This imbalance means that the Fed is almost always augmenting commercial bank reserves by buying securities, allowing the banks to use their larger reserves to expand credit and borrowing. Thus the rate defended by the Fed is lower than the rate at which the commercial banks would be willing to lend each other if the Fed did not exist.

Back to Friday's MBS purchases. Historically, the Fed's open market operations have been confined to US Treasuries. Clauses 3 to 6 of the Guidelines for the Conduct of System Operations in Federal Agency Issues ensured that Federal Reserve operations could not engage in temporary purchases of securities issued by federal agencies like Freddie Mac and Fannie Mae.[2]

In an August 1999 Fed meeting officials temporarily suspended clauses 3 to 6, giving themselves the authority to freely purchase Ginnie Mae–, Freddie Mac–, and Fannie Mae–issued MBS on a provisional basis without hindrance on size and timing. The reason given: it needed full reign to inject money into the banking system in preparation for the year 2000 crisis.[3] The period for which the temporary suspension was to extend was from October 1, 1999 through April 7, 2000.

The year 2000 crisis proved a dud. But rather than removing the temporary suspension on buying MBS, the Fed renewed the suspension in 2000 and 2001 before permanently striking off clauses 3 to 6 in 2002. In recent Fed documents, only clauses 1 and 2 are listed. This storyline may sound familiar to Fed watchers. The Fed was founded in response to the crisis of 1907, and had its ability to increase the money supply dramatically increased during another crisis, the Great Depression, where gold convertibility was suspended.

Since the Orwellian rewriting of the Guidelines the Fed has been gradually expanding its MBS purchases, which reached a crescendo this Friday. This (relatively) new power of the Fed is startling given the current liquidity crisis prevailing in the mortgage markets of late. By openly stating its willingness to buy thousands of mortgages and temporarily to expose itself to the financial health (or lack thereof) of the homeowning public, and doing so when the rest of the world is shunning them, the Fed is propping up mortgage markets, and thereby the housing market. This despite the fact that open market operations are not supposed to support individual sectors of the market or channel funds into issues of particular agenciess[4]

While the purchases are only temporary — the cash must be returned by Monday — one wonders how long before the Fed grants itself the power to buy MBS permanently. Either way, the Fed's response shows that it is worried about the growing mortgage crises and willing to do anything to buy its way out of it. Unfortunately, by buying up MBS and propping up the market the Fed will only cause more harm than it already has.

silverharp

Minder wrote: »

Apparently Prechter doesn't know all the answers

it's worth keeping an eye on but so far the amounts seem small


http://globaleconomicanalysis.blogspot.com/2007/11/liquidity-pump-runs-dry.html


Despite hopes that the Fed can reverse these pressures, the fact is that the entire amount of "liquidity” added to the banking system by the Fed in the past four months amounts to about $15 billion (in a banking system with a thousand times that in loans and assets). On Thursday, several news stories reported that the Fed “pumped $47.25 billion of liquidity into the banking system,” the highest total since September 2001 - but you'll find once again that $40.5 billion of that was pure rollovers of existing repos (which Thomson Financial noted in a news story the day before as my ballpark expectation). The rest is pre-holiday liquidity to accommodate demand for cash. Investors are deluding themselves when they count each rollover of a 3-day, 7-day or 14-day repo as new money. It's the same stuff, rolled over to retire the maturing stuff. The amount of outstanding repos is currently only about $15 billion more than its lowest 30-day average over the past year.