Myths about fed. reserve.. True or false?

Discussion in 'Economy' started by krizanova, Apr 17, 2012.

  1. krizanova
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    krizanova Rookie

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    Hi guys!
    This is my first post and my knowledge in economics is that of a first year law/economics student.
    I wanted you to help me clarify two issues:

    1) Myth (???) nr.1 - Federal reserve is PRivately owned... a lot of politicians mention this fact very often lately etc etc.
    Is it??? Wikipedia says, it is illegal foR Fed to act in profit - which basically counter acts the"privately owned" goal. which would be profit..... etc etc.
    Can someone please clarify this issues for me? (helpful links, opinions)

    2) IF Fed is state owned, TO WHOM THE US GOV. HAS TO PAY THE 6 trillions of debt (total debt to fed reserve)??? ( from those 1.63 billions is owned in US tre
    asure securities)


    I would appreciate if you could share your knowledge.
    Thank You!
     
  2. DSGE
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    DSGE VIP Member

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    Hey! Good luck with the degree. Make sure you know how to take a derivative, because it gets a bit mathsy after first year.


    1) Banks which are members of the Federal Reserve System are required to buy equity in the Federal Reserve. This equity, similar to how regular banks hold equity, is to protect the Federal Reserve from any losses it may take on its balance sheet. After all expenses of the Fed are paid for, the remaining revenue is used to pay a dividend of up to 6% to equity holding banks, and any revenue remaining after that is relinquished to the Treasury.

    The Federal Reserve System is composed of 12 regional reserve banks, and private member banks are allowed to vote for regional bank presidents.

    The decisions the Fed makes are made by two groups: the Board of Governors and the Federal Open Market Committee.

    The BoG is a group of 12 people appointed by the President of the United States and confirmed by the senate. The BoG has the power to set the discount rate, reserve requirements, and the interest rate on reserves.

    The FOMC is a group of 12 people, 7 (a voting majority) of which are from the BoG and 5 of which are regional bank presidents (who serve on a rotating basis). The FOMC makes decisions on open market operations, controlling the monetary base and setting the Fed Funds rate.

    It's pretty dumb that regional bank presidents get to serve on the FOMC (as they're elected by member banks), but decisions are ultimately made by people appointed by the President.


    2) I don't quite understand your second question, but I think I get the gist of it. The Fed holds Treasury securities, so when those securities mature the US Treasury must pay money to the Fed. The Fed will usually take the principal and purchase more securities to maintain the size of their balance sheet; interest payments will be returned to the Treasury if they remain after Fed expenses and dividends are paid.

    Hope that helps.
     
  3. TakeAStepBack
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    TakeAStepBack Gold Member

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    1) Yes, it is a 12 member private bank charter. All additional revenu after the 6% dividend is suppose to be paid back to the treasury. Since 2010, the treasury has taken this in the form of IOUs to help balance the feds books.

    2) The Fed is not State owned. It is, however, run in part by certain criteria given by the charter, the treasury and congress (US president appointed Chief).
     
  4. Widdekind
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    Widdekind Member

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    member-banks "ante in"



    DR = short-term "Fed-to-bank" loans of Reserves (IR on those loans)
    FFR = overnight "bank-to-bank" loans of Reserves (IR on those loans)

    IROR = "Fed-to-bank" (IR on required Reserves)

    RR = fraction of Deposits required to be Reserved​
    the Prime Rate = FFR + 3%
    the DR = FFR + (1/2 to 1)%

    seemingly, the FFR is the "base" from which all other rates are defined; the FOMC, with a "heavy helping" of private-finance-sector expert assistance, sets the FFR "base"
     
    Last edited: Apr 17, 2012

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