Rethinking fed's role


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  • From December 1912 to December 1913, the Glass-Willis proposal was hotly debated, molded and reshaped.  By December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise—a decentralized central bank that balanced the competing interests of private banks and populist sentiment.he Banking Act of 1935 called for further changes in the Fed’s structure, including the creation of the Federal Open Market Committee (FOMC) as a separate legal entity, removal of the Treasury Secretary and the Comptroller of the Currency from the Fed’s governing board and establishment of the members’ terms at 14 years. Following World War II, the Employment Act added the goal of promising maximum employment to the list of the Fed’s responsibilities. In 1956 the Bank Holding Company Act named the Fed as the regulator of bank holding companies owning more than one bank, and in 1978 the Humphrey-Hawkins Act required the Fed chairman to report to Congress twice annually on monetary policy goals and objectives.The 1970s saw inflation skyrocket as producer and consumer prices rose, oil prices soared and the federal deficit more than doubled. By August 1979, when Paul Volcker was sworn in as Fed chairman, drastic action was needed to break inflation’s stranglehold on the U.S. economy. Volcker’s leadership as Fed chairman during the 1980s, though painful in the short term, was successful overall in bringing double-digit inflation under control.Two months after Alan Greenspan took office as the Fed chairman, the stock market crashed on October 19, 1987. In response, he ordered the Fed to issue a one-sentence statement before the start of trading on October 20: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” The 10-year economic expansion of the 1990s came to a close in March 2001 and was followed by a short, shallow recession ending in November 2001. In response to the bursting of the 1990s stock market bubble in the early years of the decade, the Fed lowered interest rates rapidly. Throughout the 1990s, the Fed used monetary policy on a number of occasions including the credit crunch of the early 1990s and the Russian default on government securities to keep potential financial problems from adversely affecting the real economy. The decade was marked by generally declining inflation and the longest peacetime economic expansion in our country’s history. During the early 2000s, low mortgage rates and expanded access to credit made homeownership possible for more people, increasing the demand for housing and driving up house prices. The housing boom got a boost from increased securitization of mortgages—a process in which mortgages were bundled together into securities that were traded in financial markets. Securitization of riskier mortgages expanded rapidly, including subprime mortgages made to borrowers with poor credit records.
  • During the early 2000s, low mortgage rates and expanded access to credit made homeownership possible for more people, increasing the demand for housing and driving up house prices. The housing boom got a boost from increased securitization of mortgages—a process in which mortgages were bundled together into securities that were traded in financial markets
  • Securitization of riskier mortgages expanded rapidly, including subprime mortgages made to borrowers with poor credit records. House prices faltered in early 2006 and then started a steep slide, along with home sales and construction. Falling house prices meant that some homeowners owed more on their mortgages than their homes were worth. Starting with subprime mortgages, more and more homeowners fell behind on their payments. Eventually, this spread to prime mortgages as well. The rising number of delinquencies on subprime mortgages was a wake-up call to lenders and investors that many residential mortgages were not nearly as safe as once believed. As the mortgage meltdown intensified, the magnitude of expected losses rose dramatically. Because millions of U.S. mortgages were repackaged as securities, losses spread across the globe. It became very difficult to determine the value of many loans and mortgage-related securities. In addition, the widespread use of complex and exotic financial instruments made it even harder to figure out the vulnerability of financial institutions to losses. Institutions became increasingly reluctant to lend to each other.  
  • The situation reached a crisis point in 2007 when these fears about the financial health of other firms led to massive disruptions in the wholesale bank lending market.As a result, rates on short-term loans rose sharply relative to the overnight federal funds rate. In the fall of 2008, two large financial institutions failed: the investment bank Lehman Brothers and the savings and loan Washington MutualThe extensive web of connections among major financial institutions meant that the failure of one could start a cascade of losses throughout the financial system, threatening many other institutions
  • The extensive web of connections among major financial institutions meant that the failure of one could start a cascade of losses throughout the financial system, threatening many other institutions. Confidence in the financial sector collapsed and stock prices of financial institutions around the world plummeted. Banks were unable to sell most types of loans to investors because securitization markets had stopped working. As a result, banks and investors clamped down on many types of loans by tightening standards and demanding higher interest rates—a classic credit crunch. Tight credit weakened spending on big-ticket items financed by borrowing: houses, cars, and business investment.
  • In response to the economic crisis, the Federal Reserve’s policy making body, the Federal Open Market Committee, slashed its target for the federal funds rate over the course of more than a year, bringing it nearly to zero by December 2008.This is the lowest level for federal funds in over 50 years and effectively is as low as this key rate can go. Cutting the federal funds rate helped lower the cost of borrowing for households and businesses on mortgages and other loans
  • To stimulate the economy and further lower borrowing costs, the Federal Reserve turned to unconventional policy tools. It purchased $300 billion in longer-term Treasury securities, which are used as benchmarks for a variety of longer-term interest rates, such as corporate bonds and fixed-rate mortgages. To support the housing market, the Federal Reserve authorized the purchase of $1.25 trillion in mortgage-backed securities guaranteed by agencies such as Freddie Mac and Fannie Mae and about $175 billion of mortgage agency longer-term debt. These Federal Reserve purchases have reduced mortgage interest rates, making home purchases more affordable.
  • In End the Fed, Paul draws on American history, economics, and anecdotes from his own political life to argue that the Fed is both corrupt and unconstitutional. He states that it is inflating currency today at nearly a Weimar or Zimbabwe level, which Paul asserts is a practice that threatens to put the United States into an inflationarydepression where $100 bills are worthless. He further maintains that most people are not aware that the Fed — created by the Morgans and Rockefellers at a private cluboff the coast of Georgia[citation needed] — is actually working against their own personal interests.Paul also draws on the historical links between the creation of central banks and war, explaining how inflation and devaluations have been used as war financing tools in the past by many governments from monarchies to democracies.
  • The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary
  • Print as much paper money as they can , by now qe2 is adapted , qe3 may be following .who knows .
  • What Are the Advantages of the Gold Standard?:The benefit of a gold standard is that money is backed by a fixed asset. It provides a self-regulating and stabilizing effect on the economy. The government can only print as much money as its country has in gold. This discourages inflation, which is too much money chasing too few goods. It also discourages government budget deficits and debt, which can't exceed the supply of gold. In addition, more productive nations are directly rewarded. As they export more goods, they can accumulate more gold. They can then print more money, which can be used for investing in and increasing these profitable businesses.The gold standard discourages government debt and budget deficits, as well as trade deficits. Countries with any deficit lost gold from their reserves in order to pay their creditors.The gold standard has also spurred exploration. It is why Spain and other European countries discovered the New World in the 1500's - to get more gold and increase the country's prosperity. It also inspired the Gold Rush in California and Alaska during the 1800's.What Are the Disadvantages of the Gold Standard?:One disadvantage of a gold standard that the size and health of a country's economy is dependent upon its supply of gold, not the resourcefulness of its people and businesses. Countries without any gold are at a competitive disadvantage. However, this is an advantage to the U.S., which is the world's second largest gold mining country behind South Africa. Most U.S. gold mining occurs on federally owned lands in twelve western states, with Nevada being the primary source. Australia, Canada and many developing countries also are major gold producers. (Source: National Mining Association)The gold standard causes countries to become obsessed with keeping their gold, rather than improving the business climate. For example, during the Great Depression, the Federal Reserve raised interest rates to make dollars more valuable and prevent people from demanding gold. However, the Fed should have been lowering rates to stimulate the economy.
  • Utah took its first step Friday toward bringing back the gold standard when the state House passed a bill that would recognize gold and silver coins issued by the federal government as legal currency.The House voted 47-26 in favor of the legislation that would also exempt the sale of gold from the state capital gains tax and calls for a committee to study alternative currencies for the state.The legislation now heads to the state Senate, where a vote is expected next week.Under the bill, the coins would not replace the current paper currency but would be used and accepted voluntarily as an alternative.If the bill passes, Utah would become the first of 13 states that have proposed similar measures. The others states are Colorado, Georgia, Montana, Missouri, Indiana, Iowa, New Hampshire, Oklahoma, South Carolina, Tennessee, Vermont and Washington.Backers of Utah's bill say they want to send a message to the rest of the country."People sense that in the era of quantitative easing and zero interest rates, something has gone haywire with our monetary policy," said Jeffrey Bell, policy director for the Washington-based American Principles in Action, which helped shape the bill."If one state recognizes gold as a valid currency, I think it would embolden people not just in other states but in Washington," he said.The U.S. used the gold standard from 1873 until 1933, when President Franklin D. Roosevelt outlawed the private ownership of gold amid the Great Depression. President Richard Nixon abandoned the gold standard altogether when he announced in 1971 that the U.S. would no longer convert dollars to gold at a fixed value.Critics of the gold standard say it limits countries' control over its monetary policy and leaves them vulnerable to financial shocks, such as the Great Depression. But supporters argue that the current financial system's dependence on the Federal Reserve exposes the value of U.S. money to the risk of runaway inflation.
  • Nonfarm payroll employment increased by 216,000 in March, and the unemployment rate was littlechanged at 8.8 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred inprofessional and business services, health care, leisure and hospitality, and mining. Employment inmanufacturing continued to trend up.
  • Rethinking fed's role

    1. 1. Minh Duyen Tran RETHINKING FED‘S ROLELeanh PhanLu Jiongming
    2. 2. A GENDA Brief history oF FED Why do we need FED FED in the Finance crisis and response Cancel FED? Definitely not
    3. 3. B RIEF HISTORY OF F EDERAL R ESERVE 1913: The Federal Reserve System is Born The Banking Act of 1935 called for further changes in the Fed’s structure 1970s-1980s: Inflation and Deflation 1980: Setting the Stage for Financial Modernization 1990s: The Longest Economic Expansion 2006 and Beyond: Financial Crisis and Response Source:
    4. 4. W HY DO WE NEED THE F ED ? Before the Federal Reserve was created in 1913, there were over 30,000 different currencies floating around in the United States. Currency could be issued by almost anyone -- even drug stores issued their own notes. Before the Fed was created, banks were collapsing and the economy swung wildly from one extreme to the next. The faith Americans had in the banking system was not very strong. This is why the Fed was created. The Feds original job was to organize, standardize and stabilize the monetary system in the United States. It had to set up a method that could create "liquidity" in the money supply
    5. 5. FED’ S R OLE The Governments Bank The Fed as Regulator The Feds Role in Monetary Policy
    6. 6. T HE G OVERNMENT S B ANK The Federal Reserve acts as the banker for the U.S. government. The Fed processes a wide range of electronic payments for the government, such as Social Security and payroll checks. The Fed also issues, transfers, and redeems U.S. Treasury securities and conducts Treasury securities auctions. The Fed has two divisions: One group, the Board of Governors, is responsible for setting monetary policy and managing the nations money; the other group, the 12 regional Reserve Banks, acts as the service division that carries out the policy and oversees financial institutions. The regional Reserve Banks represent the private sector. Both of these groups have the same goals.
    7. 7. T HE G OVERNMENT S B ANK In its role as money manager, the Fed has two primary goals:  Maintain stable prices (control inflation)  Ensure maximum employment and production output It achieves these goals indirectly by raising or lowering short-term interest rates. Although these are two separate goals, the outcome of each is the same -- a stable economy.
    8. 8. T HE F ED AS F INANCIAL I NSTITUTION R EGULATOR As a regulator for financial institutions, the Fed establishes the rules of conduct that these institutions must follow. The Federal Reserve also watches out for the public interest by monitoring banks that are seeking to merge with other banks or holding companies. The Fed rules on these requests according to the impact the merger will have on the local community and general public interest.Fed Tasks:A Banks Bank Just as banks serve their customers, the Fed acts as a bank for banks. The Fed keeps the pipeline of transactions flowing. It processes and clears one-third of all the checks processed in the country -- thats about 20 billion checks per year.
    9. 9. T HE F ED S R OLE IN M ONETARY P OLICY The countrys economic performance is The Federal Reserves most influenced by many factors--economic critical role is to keep the performance abroad, fiscal policy economy healthy through determined by the legislative and the proper application of executive branches of government, and monetary policy. monetary policy carried out by the Federal Reserve. Monetary policy refers to the actions the Fed takes to influence financial conditions in order to achieve its goals. The Feds primary control is in the raising and lowering of short-term interest rates. In doing this, the Fed can indirectly influence demand, which then influences the economy.
    10. 10. F INANCIAL CRISIS AND RESPONSE driving up house prices increasing the demand for housinghomeownership possible for more people low mortgage rates
    11. 11. F INANCIAL CRISIS AND RESPONSE Riskier mortgages expanded rapidly Subprime mortgages made to borrowers with poor credit records House prices faltered in early 2006  homeowners fell behind on their payments  residential mortgages were not nearly as safe as once believed  the mortgage meltdown intensified  losses spread across the globe
    12. 12. F INANCIAL CRISIS AND RESPONSE The situation reached a crisis point in 2007   rates on short-term loans rose sharply 2008, two large financial institutions failed
    13. 13. F INANCIAL CRISIS AND RESPONSE The extensive web of connections among major financial institutions  the failure of one could start a cascade of losses throughout the financial system Domino effect
    14. 14. F INANCIAL C RISIS AND R ESPONSE Federal Reserve provided non-recourse loans to the bank JP Morgan Chase to facilitate its purchase of certain Bear Stearns assets. Following the collapse of the investment bank Lehman Brothers, financial panic threatened to spread to several other key financial institutions, potentially leading to a cascade of failures and a meltdown of the global financial system. Federal Reserve provided secured loans to the giant insurance company American International Group (AIG) because of its central role guaranteeing financial instruments.
    15. 15. F INANCIAL CRISIS AND RESPONSE federal funds rate lowest level Nearly for federal 0% funds in over 50 years
    16. 16. F INANCIAL CRISIS AND RESPONSE purchased $300 billion in longer-term Treasury securities purchase of $1.25 trillion in mortgage-backed securities: Freddie Mac and Fannie Mae Purchased of $ 175 billion of mortgage agency longer-term debt.   reduced mortgage interest rates, making home purchases more affordable
    17. 17. C ANCEL FED ?
    18. 18. C ANCEL FED ? End the Fed—Written by Ron Paul in 2009 “In the post-meltdown world, it is irresponsible, ineffective, and ultimately useless to have a serious economic debate without considering and challenging the role of the Federal Reserve”
    19. 19. C ANCEL FED ?1. the Federal Reserve is a privately owned agency
    20. 20. C ANCEL FED ?2. Federal reserve has no reserve.
    21. 21. C ANCEL FED ?3. The Federal Reserve has never been audited, ever!
    22. 22. 4.Return to Gold Standard
    23. 23. C ANCEL FED ? 2011-03 Utah House Passes Bill Recognizing Gold, Silver as Legal Tender Resources: legal-tender/
    24. 24. C ANCEL FED ? GDP Recovery In the fourth quarter of 2010, real GDP increased 3.1 percent.source:
    25. 25. C ANCEL FED ?Source:
    26. 26. C ANCEL FED ?Robert McTeer: 14 years as president of the Federal Reserve Bank of Dallas“We do not know what situation would be without Quantitative-easing program, but it works , at least for stock market. My conclusion is QE2 works , but it is time to end ”Source:
    27. 27. C ANCEL FED ?Next step ? Interest QE3 ? rate ?
    28. 28. C ANCEL FED ?Our conclusion is :1. End the Fed is kind of bonus for politician , but it release some critical questions about Fed.2. Fed should acting more transparent towards people.3. Data released by US government show positive about economic. Fed really works.4. Fed acting positive while it stands for America, not for international.5. End the Fed ? No!!!