Who owns the Fed? Is the Fed really privately owned?
I don't know, and I don't really care (except perhaps out of idle curiosity). Learning who has really owned the Fed all these years would make little or no difference to how I view the Fed.
I expect someone determined enough to argue the case could show that the Bank of Canada, as a Crown Corporation, is really privately-owned, and foreign-owned at that. Elizabeth Windsor from England owns it. And she controls it too, because her Canadian representative chose the man who chose another man who appointed the Directors who appointed the Governor and Senior Deputy Governor of the Bank of Canada.
But to any reasonable person, all that is a constitutional/legal fiction, albeit an important fiction. What matters is where the Bank of Canada's profits go, and they go to general government revenues, not to the monarch's privy purse.
Yet where the profits go is still not the most important question. If the Bank of Canada were trying to maximise those profits, it is doing a very bad job of it. $2 billion a year, a 5% rate of return on its assets, is not very much for a corporation with more or less a monopoly on the right to print money. The Fed, which chooses roughly the same rate of money growth and inflation as the Bank of Canada, is no better at maximising profits.
Walter Bagehot wrote Lombard Street in 1873. The Bank of England was not nationalised until 1946. It is nowadays a commonplace to distinguish between commercial banks, which are supposed to maximise the profits of their shareholders, and central banks, which are supposed to act in the general public interest. What fascinated me most about reading Lombard Street was seeing Bagehot struggle to create this very distinction, and argue that the Bank of England was a central bank and very different from all the other banks. And all the time the directors of the Bank of England were arguing that no, the Bank of England wasn't different, and was really just an ordinary bank like all the other commercial banks. The Bank of England carried out its role and duties as a central bank while denying that it had any such role or duties.
Public choice theory teaches us that nominally public bodies can sometimes act in the private interests of those who run them. Bagehot taught me that nominally private bodies can sometimes act in the way public bodies are supposed to act.
That's why I don't really care who nominally owns the Fed. What matters is how it acts, and what functions it performs. By the duck test, it's a government-owned central bank, just like all the rest.
Worthwhile Canadian Initiative 
You’re right. It’s absolutely irrelevant.
More interesting is how people use the ownership issue to advance an ideological position on the role of the Fed.
Ownership becomes relevent when the Fed is accused of favoring certain banks over others, especially in a financial crisis.
anon: but what is that ideological position? Because I can’t figure out any clear position on the political spectrum where it’s coming from. One of the earliest people I heard it from was a very active supporter of Hilary Clinton.
Alex: suppose (I have no idea whether it’s true) that the Fed does favour certain banks over others. Would “ownwership” determine that (whatever “ownership” means in this context)? Or would it be determined by who appoints the directors? Or where those directors previously worked?
Bagehot attaches a lot of importance to the fact that the directors of the Bank of England were not bankers, but merchants. And that they were appointed directors at a very young age, and so “grew up” under the tutelage of senior directors, who had appointed them.
The ideological connection is ambiguous. Right or left can use it for their own purpose. It’s private so its out of control so abolish it (Ron Paul and the Austrians). Or its private so nationalize it and let Congress run it (left).
That sort of flexibility again is why the issue is irrelevant.
“It is nowadays a commonplace to distinguish between commercial banks, which are supposed to maximise the profits of their shareholders, and central banks, which are supposed to act in the general public interest.”
What hogwash! More and more debt on the lower and middle class in the high wage countries is NOT in the general public interest although it might of interest to the biggest investment banks and regular banks. What would be of general public interest would be positive real and nominal earnings growth and more jobs with less debt and maybe someday zero debt.
“That’s why I don’t really care who nominally owns the Fed. What matters is how it acts, and what functions it performs. By the duck test, it’s a government-owned central bank, just like all the rest.”
I think you need to look at motivation and politics. By politics, I mean saying one thing while trying to accomplish something else that the voters would NOT agree with.
The first part of the second paragraph of Lombard Street leads one to believe that Bagehot is a contemporary blogger! Funny how little things change despite time and technology…
Nice post. The only thing I could add is that there is a perception that Bernannke is now “campaigning” for re-appointment with all his TV and town hall appearances. That makes it seem even more public.
Nice post as usual Nick, but I got to disagree with you on this. I think ownership of the Fed is not a crucial factor, but it’s more important than you think.
Each regional Federal Reserve bank is owned by its member commercial banks. As shareholders, these commercial banks get to vote for 6 of the 9 directors of their respective reserve districts. The remaining 3 are appointed by a political process. Of the 6 voted in by the banks, only three can be bankers, but this still gives the private banks significant input into choosing the board.
The board of directors in turn selects the president of the respective Reserve Bank. Five of these presidents will serve on the key 12 member FOMC at any given point where they help determine policy. They are in the minority on the FOMC, but they can still swing the vote on various policies.
So because the Fed is privately owned, the banking industry itself has some input into determining how the Federal Reserve acts through its power to vote in its own slate of directors. But in Canada, as you said, the BoC is owned by the government, not private banks, so that the process of selecting directors goes through the finance minister and is entirely political.
That’s why, when looking through the board of the BoC, notice that not a single one is an active banker. But scroll through the boards of the various Federal Reserve banks and you’ll see all sorts of bankers, including guys like Jamie Dimon of JP Morgan Chase. As far as influencing policy goes, I’d rather be a banker in the US than in Canada. Is it ok for the student of economics not to care who owns the central bank? Probably. The returns to integrating other aspects of central banking into one’s viewpoint are probably higher than the returns to integrating the ownership question.
JP: Good criticism. I think it might matter whether central banks are run by bankers. “merchants”, or economists (or lawyers, who run everything else).
JP Konig: “So because the Fed is privately owned, the banking industry itself has some input into determining how the Federal Reserve acts through its power to vote in its own slate of directors. But in Canada, as you said, the BoC is owned by the government, not private banks, so that the process of selecting directors goes through the finance minister and is entirely political.
“That’s why, when looking through the board of the BoC, notice that not a single one is an active banker. But scroll through the boards of the various Federal Reserve banks and you’ll see all sorts of bankers, including guys like Jamie Dimon of JP Morgan Chase. As far as influencing policy goes, I’d rather be a banker in the US than in Canada.”
Bernanke recently defended the Fed as a protector of financial consumers, opposing the creation of a Consumer Financial Protection Agency. Given recent experience, that defense is questionable. Do we really believe that bankers, even well-intentioned ones, have the right worldview to protect the interests of borrowers? The increasing socio-economic stratification of U. S. society is a well-known problem. What has the Fed done about it? Have they even exacerbated it? To what extent is their inaction a result of viewing the world as creditors, not as debtors?
http://www.pittsburghlive.com/x/pittsburghtrib/opinion/columnists/guests/s_593875.html
“Bagehot first alerted readers to this potential and offered his suggestions for containing it in an article that appeared in The Economist after the great panic and credit crisis of 1866. That panic witnessed the spectacular collapse of Overend, Gurney & Co., which had long been Great Britain’s premier investment house.
Bagehot understood that, during such panics, the Bank of England alone commanded the confidence needed to serve other financial firms as a “lender of last resort.” But as Bagehot put it later in his book “Lombard Street: A Description of the Money Market” (1873), the bank’s “faltering way” — its arbitrary and inconsistent use of its unique lending powers — tended only to make things worse.
“The public,” Bagehot wrote, “is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made. … And until we have on this point a clear understanding with the Bank of England, both our ability to avoid crises and our terror at crises will always be greater than they would otherwise be.”
If you have a Central Bank, it will be a LOLR. As such, investors and bankers will act on the presuppositions that flow from this reality. The only question is what will be guaranteed in a crisis. It will not be possible politically for a LOLR to stand idly by. As I recall Bagehot, he complained that the B of E was tardy in realizing this. Following Bagehot, dithering and changing criteria by a LOLR make a crisis worse.
“The public,” Bagehot wrote, “is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made. … And until we have on this point a clear understanding with the Bank of England, both our ability to avoid crises and our terror at crises will always be greater than they would otherwise be.”
The ultimate source of trouble, Bagehot believed, was the very existence of the Bank of England and the special privileges it enjoyed. But because nothing save a revolution seemed likely to do away with the “Old Lady of Threadneedle Street,” as it was called, Bagehot’s preferred, practical solution was for the bank expressly to commit itself to lending freely during crises, though on good collateral only, and at “penalty” rates.
The restrictive provisions were supposed to limit aid to otherwise solvent firms panic had rendered illiquid.”
In other words, a LOLR needs to be a LOLR in a crisis.
“Bagehot’s recommendation has since become a sort of master precept of central banking — albeit one that’s mainly honored in the breach by central bankers.
To be fair to today’s central bankers, there’s never been much agreement on how to apply Bagehot’s rule in practice. Just what do “good collateral” and “penalty rates” mean in times like these?
While no one might precisely be able to define good collateral — and one can debate whether the rate at which banks offer to lend unsecured funds to other banks, known as the London Interbank Offered Rate, or LIBOR rate, plus 8 percent constitutes a “penalty” rate — who even pretends that recent central bank lending has been based on good collateral?
But rescuing insolvent firms is the least of it. The real damage comes from the Treasury’s utter lack of any consistent last-resort lending rule. The recently enacted financial institutions bailout bill does little to clarify this.
That’s just the sort of thing that troubled Bagehot almost a century and a half ago, when central banks were still in their swaddling clothes. Yet central bankers and governments still don’t get it, despite the lip service they pay to this great thinker from our past.”
In the modern world, the LOLR needs to be perceived as being owned by the govt. It can’t be seen as a private business, which can decide whether or not to aid the financial system. As well, if taxpayers can be held responsible for its actions, it needs to be a govt entity of some sort. Having said that, I don’t really believe that an Independent Fed is possible or desirable.
Based on Bagehot, I believed that we needed to guarantee everything in this crisis. That basically violates Bagehot’s rules. Hence, I’ve given up my prior belief that Bagehot’s Rules, correctly applied, can suffice. They are always violated. We need a better set of rules or basis to underpin even Bagehot’s Rules.
Konig is correct, though he missed the part where the Board of Governors must approve the Presidents chosen by the Boards of Directors.
Another oddity is that the elections for the boards of directors for each Federal Reserve bank are one vote per bank, not one vote per share. Further, the banks are divided into large, medium and small groups, and each group selects two directors, a banker and a nonbanker.
Only a minority of the Fed presidents are voting members of the FOMC:
The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options.
I’m slowly reading through Lombard Street and, as a non-economist, find it a fascinating and eminently readable explanation. Thanks so much for the link.
Two hats: Lombard Street is beautiful, isn’t it. But what’s depressing about reading it is how little our knowledge has progressed since.
From:
http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm
“How is the Federal Reserve System structured?
The Federal Reserve System has a structure designed by Congress to give it a broad perspective on the economy and on economic activity in all parts of the nation. It is a federal system, composed basically of a central, governmental agency–the Board of Governors–in Washington, D.C., and twelve regional Federal Reserve Banks, located in major cities throughout the nation. These components share responsibility for supervising and regulating certain financial institutions and activities; for providing banking services to depository institutions and to the federal government; and for ensuring that consumers receive adequate information and fair treatment in their business with the banking system.
A major component of the System is the Federal Open Market Committee (FOMC), which is made up of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks, who serve on a rotating basis. The FOMC oversees open market operations, which is the main tool used by the Federal Reserve to influence money market conditions and the growth of money and credit.
More information
Who owns the Federal Reserve?
The Federal Reserve System is not “owned” by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.
As the nation’s central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as “independent within the government.”
The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.”
From:
“The heart of the problem here lies with the Federal Reserve Act.”
http://www.federalreserve.gov/aboutthefed/fract.htm
“As it currently stands, the all-important Section 2A reads, “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
NOTICE there is no mention of wages vs. prices (higher real earnings / better standard of living), debt levels, asset price levels, ability to retire, or even higher nominal wages.
“independent within the government.”
Scary, especially if you are a middle class person in a high wage country???
More from:
“And even that may not be enough. The Fed has plenty of powers to help consumers, but it just hasn’t used them. The American Banker (subscription required) quotes Barney Frank on this also, “One of the greatest unused examples of power were the consumer protection powers we’ve given the Fed.”
Why? Again, Frank – as chair of the House Financial Services Committee – should know, “If you look at the Fed governors, their focus has been on the safety and soundness of the banking system, not consumers.”
The tip off here is that banks of all kinds want enforcement of consumer protection laws to stay with existing bank regulators where, John C. Dugan, Comptroller of the Currency claimed recently “it works well.” But he doesn’t mean that this arrangement protects consumers. He means that it protects banks and the banking system – whenever necessary (like now) consumers can be squeezed to improve the banks’ bottom line.
The Federal Reserve never has and never will put consumers first.”
I don’t always agree with Simon Johnson, but IMO he is definitely correct here. By consumers, let’s say the lower and middle class.
If the fed needs the lower and middle class in the high wage countries to continue to go further and further into debt to accomplish the fed’s “mission”, the fed definitely wants control of “consumer protection” (used extremely loosely) powers.
Just to be cute…
The Fed is more like the movie industry. Banks get a cut of the gross: ‘lower short-rates’ that give them a substantial profits by playing the yield curve. The government is the dim-witted newbie who signed up for a share of the ‘profits’. Well there aren’t really any. The Fed transferred them to the banks via its open market operations.
Since the banks actually control the voting shares, this isn’t at all surprising. The shareholders do get their profits and the taxman gets the crumbs.
Nick,
I’d like to ask you a question that I just asked Scott:
If I believe that in Sept. 08 we avoided a Debt-Deflationary Spiral, and that we’ve had low grade Debt-Deflation since, following Fisher/Friedman, is it even possible that Monetary Policy was too loose prior to Sept. 08?
Also, I’m reading Friedman now as a Pragmatist. Whether he’s a Behaviorist/Pragmatist I’m still unclear about. Of course, I don’t want him to be, so that might influence how I end up interpreting him. But, hey, check out the discussion on these threads about Rorty and Friedman:
http://blogsandwikis.bentley.edu/themoneyillusion/?p=2167#more-2167
http://blogsandwikis.bentley.edu/themoneyillusion/?p=2102
Take care,
Don
PS. From Wittgenstein:
“At the end of reasons comes persuasion.”
“The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.”
In the USA, does 6% per year sound like a good dividend right now?
How about how does a 6% per year dividend and a price inflation target of about 2% sound? Looks like a positive real “dividend” to me.
“What matters is where the Bank of Canada’s profits go, and they go to general government revenues, not to the monarch’s privy purse.”
Replace Bank of Canada with the fed and allow for interest on reserves.
Do interest on reserves mean the fed has less profits and therefore less goes to gov’t revenues?
“What matters is where the Bank of Canada’s profits go, and they go to general government revenues, not to the monarch’s privy purse.
Yet where the profits go is still not the most important question. If the Bank of Canada were trying to maximise those profits, it is doing a very bad job of it. $2 billion a year, a 5% rate of return on its assets, is not very much for a corporation with more or less a monopoly on the right to print money. The Fed, which chooses roughly the same rate of money growth and inflation as the Bank of Canada, is no better at maximising profits.”
If a central bank’s profits go to general gov’t revenues, maybe the central bank is not trying to maximize its OWN profits but someone else’s profits?
Don: “If I believe that in Sept. 08 we avoided a Debt-Deflationary Spiral, and that we’ve had low grade Debt-Deflation since, following Fisher/Friedman, is it even possible that Monetary Policy was too loose prior to Sept. 08?”
That’s a strange question. If you had said “too tight” instead of “too loose” I would have found it easier to understand.
Since we want to avoid debt-deflation, and if you believe we have had low grade debt-deflation since Sept 08, then it follows almost by definition that monetary policy was too tight. (OK, it’s not really by definition, since the economists’ view that tighter money causes lower inflation and looser money higher inflation is built in.)
You answered my question, even if I phrased it poorly. I was trying to say that monetary policy must have been too tight, and so couldn’t have been too loose. I hope that I make more sense now.
Don: Yep, that makes sense.
I expect that someone who disagreed could say that monetary policy was already as loose as it could be, with 0% interest rates. Or could say that it was looser than “normal” as measured by interest rates (to which Scott would reply “But interest rates are a poor measure, and what matters is not relative to ‘normal’, whatever that might mean, but relative to what is needed to keep NGDP growing at 5%!”)
Nick,
Thanks. You’re the best.
Take care,
Don
Yes… see my cheeky comment above. Its people who do yield curve conversion, i.e., banks, who benefit from the CBs policies.
Actually, I would question whether there is anything wrong with bankers having a lot of influence at the central bank. I recall a 2005 conference paper by Goehlmann and Vaubel which reported that central banks with more bankers and less academic economists on their boards had better performances in terms of inflation. My explanation for this was that academics tend to like taking controversial theoretical positions, from which the government pick the most helpful (I was sure that Bernanke would become Fed chairman as soon as I heard reports of his November 2002 speech), whereas the bankers are more practical and sceptical. Maybe bankers have changed since that survey though, becoming more concerned with trading and less with lending.
The 12 Federal Reserve Banks are owned by their member banks. The scam is that the stockholders of the FED can pledge “collateral” (U.S. Government bonds) to borrow money at the discount window to purchase more government bonds, to pledge as collateral, to borrow more money, to purchase more government bonds, etc…. GET IT??? The Fed Res. Banks just change numbers in their accounts at the FED, so the bankers make interest off the U.S. taxpayer from money that does not exist.