United-States : the Fed Bails Out Wall Street

The Federal Reserve System of the United States

The Federal Reserve System, or Fed, is the United States’ Central Bank.

It is an independent structure with private activity within the US government and has the responsibility for US monetary policy and thus a strong influence on the world’s financial markets. In the terms of US law, the mission of the Fed is to guarantee price stability and full employment and to ensure the stability of the financial system by taking the necessary measures to predict and attenuate financial crises and panics. To achieve this, the Fed has three important means: it controls interest-rates that influence consumption, investment and inflation; it controls the money supply which permits the stability of prices in times of crisis; and it supervises and regulates financial institutions.

Fed was created by the Federal Reserve Act of 1913 as a reaction to the growing instability of the North American financial system at the end of the nineteenth and beginning of the twentieth centuries. Until then, the US did not have centralized control and regulation of its financial system. Each state had the charge of regulating and controlling the banks that were within its jurisdiction. The Fed was established to ensure the stability of the US financial system by becoming the lender of last resort and so to be able to supply resources to banks facing difficulties.

The institutional structure of the Fed is made up of twelve regional banks overseen globally by a Board of Governors. These regional banks function as Joint Stock Companies possessing non negotiable and non transferable shares in the Federal Reserve System; the stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, six per cent per year. These shares permit the banks their participation in the elections of the regional counsellors of the Fed. The councils are made up of nine members: three are chosen by the banks and represent their interests; three more, representing industrial and commercial interests, are also chosen by the banks; the last three are chosen by the national Board of Governors.

The Board of Governors is charged with overseeing the twelve regional Federal Reserve Banks and with helping implement the United States’ monetary policy. It has a maximum of seven members (currently five) who are nominated by the President of the United States and confirmed by the Senate for a fourteen-year term of office. One of the principal functions of the Board is to pilot the Federal Open Market Committee (FOMC), which fixes interest-rates and determines the country’s general monetary policy.

There are two basic differences between the Fed and its European counter-part, the ECB.

While the Fed’s mission is to simultaneously guarantee price stability and full employment, the ECB has a principal mission to maintain low and stable inflation levels within the Eurozone. The other difference is in the capacities to regulate and control their financial institutions.

The Fed has the means to regulate and supervise all the financial institutions operating under the Federal Reserve System, while the ECB is dependent on the central banks of each of the Eurozone countries for the application of its regulations and control over its institutions. Finally, the European Commission has approved an extension of the ECB’s powers, as from autumn 2014, to responsibility for the direct control of the big banks that are subject to the European system. We shall see what we shall see.