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Federal Reserve - Essay Example

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Even as its function is of primary importance, most Americans are less familiar with the Federal Reserve than any of the major government entities. Indeed, its confusing structure,…
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Federal Reserve

Download file to see previous pages... The article argues that even as the Federal Reserve has been in existence since 1913, it wasnt until the 1970s that it assumed as great a control of the American financial system as it has today.
The Federal Reserve was created in 1913 by Woodrow Wilson. In the late 19th and early 20th centuries credit was controlled entirely by private banks. Farmers in the mid-western regions grew increasingly upset by this fact, as they complained that oftentimes the banks would alter their credit options at times when the farmers were vulnerable. The Federal Reserve was created as a compromise, with the banks still controlling credit, but the government determining the supply of funds. While the intervening years have seen significant reforms in the way the Federal Reserve operates, its underlining function has remained the same. Private banks are able to borrow from the reserve at a discounted rate, they then loan this money to borrowers at the federal funds rate, or interest rate. As the Federal Reserve raises rates, so must the banks raise the rates of loans. This system is designed to ensure fair and equitable lending throughout the country. The current chairman of the Federal Reserve, who was recently reappointed in January of 2010, and Alan Greenspan and Paul Volcker preceded him.(Johnson, Web)
When the recession hit the Federal Reserve began the process of lowering interests rates to increase consumer spending. At this point, the Fed has virtually lowered the interest rate to 0%. In addition to lowering the interest rate the Fed has engaged in a number of unorthodox methods in an effort to revive the sputtering economy. “Those techniques include buying vast amounts of longer-term Treasury bonds, mortgage-backed securities issued by government-sponsored companies like Fannie Mae and Freddie Mac and commercial debt issued by private companies and consumer lenders.” (NY Times, Web) In addition to these techniques, the reserve helped in JPMorgans merger with Bear ...Download file to see next pagesRead More
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