The Secrets of the Fed

5/26/2017

The Federal Reserve was constructed to have a significant impact on the US economy. As indicated in a recent blog post, it both reacts to economic forces and seeks to shape them.

In a 2009 60 Minutes interview, then Fed chairman Ben Bernanke discussed the role of the Fed, particularly in regard to stabilizing the US economy. This interview remains significant today because it offers a rare look inside the Federal Reserve. It has the ability to help us understand not only the actions of the Fed following the Great Recession but also the actions it continues to take today.

Pre-Writing Activity
Do some background research into the Federal Reserve making sure to look into the following topics: What is the Federal Reserve? What are its goals and role? Who owns the Fed? How do its policy tools (open market operations, discount rate, reserve requirements) operate?

Blog Activity
As discussed in the interview, the Federal Reserve was created in large part to address economic crises in the United States. After watching the video, consider the following question: How does the working of the Fed influence the way it operates and the actions it takes during financial crisis? In other words, how does its structure and designated powers impact its approach to economic challenges? Be sure to make connections between items discussed in the video and the information you gathered during pre-writing.

14 Comments

Maria O

5/27/2017 08:58:08 pm

The Federal Reserve is one of the most important institution of the United States. It is an independent entity established by the Federal Reserve Act of 1913. The Federal Reserve is not owned by anyone, but it is run by 12 regional banks to represent America’s diverse regions. The 12 regional banks are set up similarly to private banks. They store currency, process checks and make loans to the private banks they regulate.

The open market operations tool allows the Federal Reserve to buy or sell securities, such as Treasury notes from its member banks. This is the major tool the Federal Reserve uses to raise or lower interest rates.

The reserve requirement is the basis of all the Federal Reserve tools. It requires that every bank in the U.S. must have on hand each night an amount of money set by the nation’s central bank, which is normally a percent of the bank's deposits.

The discount rate is the amount the U.S. central bank charges its member banks to borrow from its discount window to maintain the reserve it requires. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.

The Federal Reserve’s main goal is to keep banks secured. It is structured to closely conduct business with banks and is constitutionally assigned to Congress under Article 1, Section 8 of the U.S. Constitution, which is to coin U.S. money.

As regulators of our nation’s central bank, the Federal Reserve studies economic trends and makes monetary policy decisions to make the economy better. Yet, they failed to recognize the risks the economy was facing before the financial crisis. Instead, they used their power to engineer bailouts of financial institutions and pump hundreds of billions of dollars into the U.S. economy through unconventional bond-buying programs.

Ben Bernanke, former Chairman of the Federal Reserve, defended the Federal Reserve decision to bail out AIG four times to prevent them from bankruptcy. They demanded that AIG divest itself, sell off its subsidiaries, and use the proceeds to pay back the government. However, Bernanke took some responsibility by saying that the Federal Reserve needed to review practices and strengthened regulations.

References: www.federalreserve.gov

http://ed.ted.com/lessons/what-gives-a-dollar-bill-its-value-doug-levinson

jerry k

7/12/2017 03:41:27 pm

1913, Congress willingly gave up its oversight responsibilities over monetary policy to a secretive "Old World European style Central Banking system" run by international bankers. They called it the Federal Reserve Bank to make it sound more American. Sadly, Congress never had the authority to establish such a bank/banking system. Under the Fed there are no true audits, all their actions are done in secret, and all these secret plans affect our purchasing power by altering the value of our money. Hear it from a congressman: https://www.youtube.com/watch?v=A4kxTkhwR_Q

Milissa P

5/30/2017 08:19:33 pm

The Federal Reserve monitors the economy and develops and implements effective US monitory policy but it also has the freedom to act immediately. When a crisis arises, they can invoke emergency powers without first getting the permission from any one of the branches of government. This allows them to act quickly to stabilize the economy when needed.

During the 2008 financial crisis they provided over a trillion dollars in loans, money, etc. to help stabilize the economy. They also adjust interest rates to control inflation. According to Ben Bernanke, Chairman of the Federal Reserve during the crisis, multiple bailouts were needed to prevent major banks to fail so our economy didn’t experience another great depression. What was different following the 2008 crisis was that the government stabilization came with conditions that some financial institutions receiving bailouts would need to divest and use their proceeds to pay the government back.

Federal Reserve committee meetings used to be held in secret with policy changes not being communicated. Now, policy changes are made available to the public as are the minutes of their meetings.

Bernanke grew up middle-class and worked hard to get where he is. He understands where the average American comes from and the struggles they go through every day. His home town was hit hard during the financial crisis, including his childhood home whose current owner was in foreclosure.

Bernanke suggested that actions need to be put in place to hold off future crises. He admits that they could have done a better job. He feels that tougher regulations need to be enacted to winding down firms without bankruptcy. He also suggests that a system regulator to oversee all banking would help. He stated that confidence is key to fixing the financial system. He said the Fed is showing progress by buying mortgages and securities brining down rates, they are also involved in money markets and business loan areas to help build confidence. He said a large bank raising private equity would be a sign of recovery.

Bernanke summed up three messages to American people:1) Fed is here to support recovery, 2) recovery won’t happen until banks and financial institutions is stabilized. 3) He has every confidence that we will recover in a stronger and more sustained way He was confident that America will remain the most powerful economic power in the world.

jerry k link

7/15/2017 06:07:54 pm

Please see this vid: The Failure of the Fed and the Depression...

https://www.youtube.com/watch?v=cHhe5migMzM

donna peluke link

5/30/2017 10:21:41 pm

The Federal Reserve is the central bank of the United States the (Fed) is not a government office, it is owned by no one. The Fed was created to balance our currency in our economic system this was put in place to have a safe and stable monetary system. The goal of this system is to control inflation and deflation of our currency, this is reached by having a balance of money in circulation. The Fed gets money by, buying and selling bonds, having set interest rates on loans to commercial banks and other institutions. Fed is to balance our dollar with the trade of goods and services. They try to keep our economic system balanced.

7/19/2017 01:55:50 pm

please see: https://www.youtube.com/watch?v=iI_BfW3lJTI

Bryce B

5/31/2017 08:32:29 am

The Federal Reserve controls the economy by setting interest rates and, when this interview was taken in 2009, they had already thrown $1 trillion into stabilizing the economy. They were created back in 1913 to deal with the financial crisis.
The most interesting part about the Federal Reserve is that the chairman of the Fed does not need prior approval from congress or the president to make decisions during a financial crisis (specifically bailing out financial institutions), which gives them a lot of power and impact when approaching these economic challenges. The Fed can make the executive decision to bailout failing institutions, and Bernanke stated in the interview that he would never let a bank fail, because doing so would be catastrophic; even using the Great Depression as an example of what would happen if the Fed allowed banks to fail.
The Fed can literally print out money and give them to the banks when they are on the verge of failure, which Bernanke said they are able to do because the Fed “pays for itself.” Having the ability to print out money and loan them to institutions without the approval of congress or the president gives the Fed ultimate power over the economy.

References:

www.federalreserve.gov

https://youtu.be/f98noWmJ4aw

Preston

6/4/2017 12:38:01 pm

I’m not really sure what is meant by this question; “how does its structure and designated powers impact its approach to economic challenges”. I mean it’s fairly straight forward, the Fed is responsible for protecting our financial systems and have regulatory responsibilities that they are responsible for as far as the banking system is concerned. I do not think its structure and designated powers impact these responsibilities in any way. In fact the Fed was instituted to protect the financial systems and that is exactly what it tries to do. Bear in mind however, the fed is run by humans, and humans make mistakes. Sometimes many. From my research and what I have learned to this point, and from Mr. Bernanke’s himself, lots of mistakes were made causing the great recession, but the totality of the situation and what caused it was much bigger than any one thing or person.

7/24/2017 04:48:36 pm

Here's a great video explaining how the U.S. Financial System works, don't miss the info found starting at: 12:00, it might shock some people!

https://www.youtube.com/watch?v=23DNe0cJhcU&t=290s

Melissa P

6/5/2017 10:41:15 pm

The Federal Reserve is a U.S federal banking system known as the central bank. The Federal Reserve was built by the Congress to support the nation with a secure, flexible, and stable monetary and financial system. The role of the Federal Reserve is to regulate the nation’s financial institutions. Although the Federal Reserve System shares a few characteristics with private-sector entities, it is not owned by anyone but is established to serve the public interest. The Federal Reserve has three primary functions which include monetary policy, banking supervision, and financial services.

The policy tool for open market is a key tool used by the Federal Reserve to implement the monetary policy. This specific tool is works by buying and selling government securities to set up the money supply. The government securities that are used in the open market are Treasury bills, bonds, and notes. In order to show an increase in money supply to our economy, securities would need to be purchased.

The federal discount rate is the interest rate Reserve banks charge commercial banks for short-term loans. If the Fed decreases the interest rate, it increases the supply of money. If the discount rate increases, it raises the price of borrowing and the money supply decreases.

Reserve requirements are the amounts of funds that a depository institution must hold in reserve against a particular deposit liabilities. The depository institutions, essential hold reserves in the arrangement of vault cash or deposits with the Federal Reserve.

Although the Federal Reserve is not heard of by many people, it is a very important institution to our economy. Bernanke, makes a valid point that the key issue in our economy is the financial system and the banking system. He does conclude that overall the crisis of 2008 has raised some important questions that are already being looked into my researchers. I believe we should continue to do so as our economy continues to fluctuate.

7/27/2017 02:19:53 pm

The Fed explained in 7 minutes, all great searchable information:
https://www.youtube.com/watch?v=-mejOviGyok

7/27/2017 10:56:27 am

See and hear the real Fed in action:

https://www.youtube.com/watch?v=uGs_Qn5yEgs

https://www.youtube.com/watch?v=P8p0nBa866E

8/2/2017 09:12:13 am

See and hear how the Fed deals with two trillion dollar "off-balance sheet" losses:

https://www.youtube.com/watch?v=GYNVNhB-m0o

Investment Analysis and Portfolio Management link

12/9/2017 04:51:32 am

Very Informative and useful... Keep it up the great work..

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The Secrets of the Fed

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