What Is the Federal Reserve - Essay Example

Teacher 28th February What is the Federal Reserve? Federal Reserve System is the central bank of the United s of America. One of the distinct features of this bank is that it is regulating the financial industry of the world’s largest economy: the United States (www.frbsf.org). It has always held a crucial position in the United States of America’s economy and played active role in the economy of the country. Since its inception, on 23rd December 1913, it has played a pivotal role in the ever growing economy of the US. President Woodrow Wilson signed the Federal Reserve Act in law in 1913 and this specialized institution came into being. During the course of its life, it has seen many revolutions like IT revolution and Hollywood industry expansion. On the other hand, economic crises like The Great Depression (1929-39) and The Global Financial Crisis (2007-08) (www.federalreserve.gov). Like other central banks, one of the main objectives of the Federal Reserve System is to regulate currency. Central Banks are important part of every economy in the modern world. But this essay aims at explaining the reasons behind major crisis and the policy failures of Federal Reserve System. This essay states that Federal Reserve Systems was not the main reason behind economic and financial crises in the past. The Structure of Federal Reserve Structure of Federal Reserve is important and has a big role in its success. Federal Reserve Bank is governed by board of governors. These governors are appointed after scrutiny and generally are seasoned economists and financial experts. Together, these members of board and sitting government work in the best interest of the world’s largest economy. Federal Reserve Bank consists on a network of 12 Federal Reserve Banks and 25 branches which work under the supervision of board of governors. It works with all banks, the US Treasury directly and the general public indirectly. It maintains the circulation of money not only in the United States but also around the world because United States Dollar is used around the globe. Member Banks of Federal Reserve include 38% of the 8,039 commercial banks. A national bank must be member of Federal Reserve System. There are more than 3,000 member banks. Moreover, in addition to banks, depository institutions, which are more than 17000, provide basic banking facilities to people (www.federalreserveeducation.org). The monetary policy making body of Federal Reserve System is called Federal Open Market Committee (FOMC). Promoting stable prices and economic growth is achieved through the policy made by FOMC. To cut the story short, this committee handles the money supply of the country. There are three statutory advisory councils: the Federal Advisory Council, the Consumer Advisory Council and the Thrift Institutions Advisory Council. The function of these advisory councils is to advise the board members of Federal Reserve System on important matters of current interest. The members of these three advisory councils are hired from 12 Federal Reserve districts. These councils generally conduct meetings bi-annually or quarterly (www.federalreserveeducation.org). The Great Depression and the Federal Reserve System There is no denying of the fact that the Great Depression, that started in 1929 and lasted till 1939, was one of the worst economic crises in the world. It sent shock wave throughout the world. At that time there were less than 100 Free states in the world and the world’s big powers were responsible for feeding most of the world. So in the after math of the First World War, the United States was one of the major powers in the world. That is why it was tough time for the United States government and its states institution. So the Federal Reserve System played an important role throughout the course of Great Depression. It not only helped the United States economy to coup with the Great Depression but also helped many other nations to do away with the affects of the Great Depression. Federal Reserve Systems is among the oldest central banks of the world. Many countries have established their central banks on the pattern of Federal Reserve System (Eustace Mullins, 2009). Criticism on Federal Reserve System Although Federal Reserve System has tried to do well during the Great Depression but some renowned economists like Milton Friedman and Anna Schwartz are of the view that it added fuel to injury during the Great Depression of 1929 through its policies. These famous economists argue that when stock market crashed in 1929 and banks were struggling due to shortage of money supply, the Federal Reserve System should have supplied the required amount of money to the economy instead of deciding not to supply money. They further state that is was not failure of the market economies but it was the failure of the regulators of the market economies (Eustace Mullins, 2009). John B. Taylor who is a famous economist argues that Federal Reserve System was responsible of the World Financial Crises of 2007. He asserts that is was wholly or partly responsible for the housing bubble that erupted before the World Financial Crises of 2007. Taylor claims that after the 2001 recession, the Federal Reserve System kept interest rates low thereby leading housing bubble to a credit crunch. Many small and large political parties and think tanks have also criticized Federal Reserve System time and again in the past (Eustace Mullins, 2009). Many policies of the Federal Reserve System have been subjected to criticism since its inception. One of the policies of the Federal Reserve System that have been widely criticized not only in the United States but also around the world is “Quantitative Easing (QE)”. Quantitative Easing can be defined as, a form of monetary policy devised by central banks to fuel an economy when a normal monetary policy could not bear fruit. In simple words, quantitative easing refers to printing a huge amount of currency to meet some short term or long term goals. Federal Reserve System has printed hundreds of billions dollars through its quantitative easing program over the period of last decade which is against the principles of central banking. Performance of the Federal Reserve System All past governments has tried to appoint responsible, able, and seasoned economists to run the Federal Reserve System and these governors achieved their short term and long term goals most of the time but nevertheless, many policies of the Federal Reserve System failed one time or another. But policy failure does not mean this institution is the reason behind crises. Managing the financial industry of largest economy of the world has never been easy even for veteran economics. The Federal Reserve System has always tried to adopt the rapid changes in not only the financial sector of the United States but also the financial sector of the world. There are other market forces that are also responsible for the crises of 1929 and 2007. The Great Depression of 1929 that lasted for next ten years was due to the failure of banking system and stock markets. On the other hand, the more recent World Financial Crisis of 2007, which is still sending ripples waves to many countries, was due to the housing and mortgages bubble and due to the credit crunch of banks. So we can say that Federal Reserve System could not take timely decision but we cannot say that Fed has caused these crisis. Conclusion This essay aimed at explaining the reasons behind major crisis and the policy failures of Federal Reserve System. There is no denying of the fact that the Federal Reserve System has a role in major economic and financial crises in the United States but we cannot say that the Federal Reserve Systems has caused any of these crises. More specifically, these crises were caused by banks and other financial institutions that did not abide by the guidelines and policies of the Federal Reserve System. Moreover, stock exchanges were crashed due to speculations and banking crisis. Before the Great Depression of 1929 and World Financial Crisis of 2007 the Federal Reserve System warned all stakeholders of dire consequences but they did not comply with Federal Reserve System’s rules and regulations. Hence it is proved that major crises like Great Depression of 1929 and World Financial Crisis of 2007 were not caused by Federal Reserve System. There crises were caused by the banks, stock exchanges and other financial institutions and may be due the sole control of a few regimes on financial sector. Works Cited Eustace Mullins (2009) “The Secrets of the Federal Reserve”, Bridger House Publishers Inc www.federalreserve.gov “What is the purpose of the Federal Reserve System?” Online from www.federalreserve.gov, n.d. Accessed 28th February 2015, http://www.federalreserve.gov/faqs/about_12594.htm www.federalreserveeducation.org “The Structure of the Federal Reserve System”, Accessed from www.federalreserveeducation.org, n.d. Accessed 28th February 2015, https://www.federalreserveeducation.org/about-the-fed/structure-and-functions www.frbsf.org “What is the Fed?” Accessed from www.frbsf.org, n.d. Accessed 28th February 2015, http://www.frbsf.org/education/teacher-resources/what-is-the-fed Read More