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The All Powerful Federal Reserve

Posted by Larry Doyle on June 12, 2009 8:10 AM |

What would our founding fathers think about the omnipotence of the Federal Reserve?

Is there any doubt that the true greatness of our Constitution is found in the balance of power amongst the executive, legislative, and judicial branches. Where in that mix is the power centered in the financial branch? Who controls the financial branch? Welcome to the kingdom of the Federal Reserve.

To whom does the Fed answer? How transparent is the Fed? Can the Fed be too powerful? Is the Fed “too big to fail?” How skilled is the Fed? Is it infallible? Does the Fed get involved in our political process? So many questions. Such limited clarity.

As our Brave New World of the Uncle Sam Economy evolves, the Fed has never been more influential in our economic and political process. Is the Fed too powerful? Let’s navigate the landscape of the Fed and see what we learn.

Rather than my regurgitating answers to frequently asked questions of the Fed, please allow me to link to the Fed’s own site for these “frequently asked questions.

Let’s dig deeper. I want to specifically address, two specific aspects which fall under, What are the Federal Reserve’s responsibilities?

-supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

-maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

Looking back over the course of the last ten years, how could any self-respecting central banker, politician, financial executive, market analyst, or financial blogger give the Fed anything other than a failing grade in these realms. Does that failing grade deserve to be assigned more to former Fed chair Alan Greenspan than Ben Bernanke? Perhaps, but the Fed as a whole failed miserably on these critically important initiatives.

As we move forward on our economic landscape, how will our “political leaders” within the executive and legislative branches address the allocation of responsibilities within the financial system?

The all powerful Fed is likely to get even more powerful. Bloomberg reports, Geithner Said to Tell Bernanke Fed Gains Most in Rules Overhaul:

The Federal Reserve is likely to emerge as the most powerful regulatory agency in the Obama administration’s plan for overhauling financial market oversight, people familiar with the proposal said.

Treasury Secretary Timothy Geithner told Chairman Ben S. Bernanke in a June 9 meeting the administration will call for the Fed to be the regulator of firms deemed too big to fail, one of the people said. While a council of regulators would share oversight of financial risks, Treasury officials describe it as weak, lacking power to make final decisions on intervening with the firms, the people said.

Is this a wise move on the adminsitration’s part? Are they concentrating too much power within one organization. I believe so. Congress may attempt to question the reasoning and efficacy of granting the Fed even greater powers. That said, this Democratic Congress will fall in line behind the Democratic administration. Any Congressional concerns, in my opinion, will serve more as pandering than legitimate legislation.

It should not take a former SEC chair to ask the hard questions and shed light on Fed failings. Bloomberg reports,

The proposal to give the Fed enhanced duties has also drawn criticism from former regulators, who say the central bank failed to curtail business practices that triggered billions of dollars of losses at financial institutions after the U.S. mortgage market collapsed in 2007.

“If the Fed hasn’t been worried about systemic risk all these years, then people really should be fired,” former SEC Chairman Richard Breeden told lawmakers in March. “Rather than simply calling for more authority for people who didn’t use the authority they already had, we need to reexamine why our regulators missed so many of the risks staring them in the face.”

Stay with Sense on Cents as I will continue to navigate the paths and policies of “The All Powerful Federal Reserve.”


  • Freddie

    LD, thanks for an interesting article. i was wondering if you have an opinion or knowledge as to what extent the owners of the Fed play a role in its policies and performance. best regards Freddie

    • Freddie,

      Thanks for the plug. Hope you like Sense on Cents!! In regard to the “owners” of the Fed . . . the Fed itself does not use that term. The Fed uses the term “members.” To that end:

      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.

      All this said, the buck ultimately stops with the Fed chair. Greenspan ruled the roost. Bernanke does the same.

      I think a very LARGE problem in regard to the Fed and Congressional oversight of the Fed is the fact that members of Congress are extremely weak in their understanding of our banking, finance, and economic systems as a whole.

      Visit and comment often!!

      • Freddie

        Hey again and thanks for that. I’m no fan of conspiracy theories etc but I think now that the Fed itself is by far the biggest speculator in the market (call it a hedge fund if you like) you’ve got to ask who is accountable and the Fed is not an entity granted by some kind of government charter. It is a joint stock company where amongst others JP Morgan and Rothschild are owners. I guess its not going to be known but I am curious as to what role these guys play in these critical times of Fed balance sheet expansion and if they really do exercise powers and rights as owners just like any other joint stock company. Needless to say JP Morgan always seem like the lender of last resort at favourable terms LTCM , Bear Sterns etc. I just wonder if we are just seeing the tip of the iceberg and I’d love to know what goes on behind the public scene. It might have some explanatory power as to whats going on.

  • fiscalliberal

    My problem with the Federal Reserve is that there is no congressional oversight with teeth to do something. So when an activist ideologue Fed Chairman like Greenspan gets in, there is no way to reign them in. By way of example, the congress pointed out to Greenspan that the sub primes were a bad thing and his Ann Rand ideology precluded his doing something about it.

    The over all situation is that we need to simplify the regulation and maybe putting it in the Fed allows concentration to address the problems and then congress can act.

  • Fiscal…great points in regard to the Congressional oversight and Greenspan. I totally concur.

    I keep coming back to the tried and true principles of transparency and integrity. I am not impugning anybody’s personal motivations but I do believe we have seen extreme measures of “the ends justifying the means” throughout this ordeal.

    The cost of that approach is unknown and currently immeasurable.

    It does provide plenty of “grist for the Sense on Cents mill!!”

  • TeakWoodKite

    LD, when the Fed chair speaks the market reacts.

    The leverage of the Fed is vanishing, from this laymans point of view. The only way interest rates are going is up… or put another way how much cheaper can the dollar get?

    When something is deemed to big to fail…what of California?

    How is the Fed to deal with the status of bankrupt States?
    They are in California’s case “too big to fail” no?

  • Melba Mauldin


    Without going into details, to whom does an individual go for help when the OCC has failed and not done their job?

    There is proof in writing and the situation has been going on for three years without resolve.

    The OCC has not acted appropriately and we need to know where it is a citizen of the United States goes to get help when a regulatory agency fails to do their job.

    According to the internet the FDIC oversees the banking systems and the OCC is the regulator for US citizens and the banks that we use.

    Please advise to whom we now escalate this matter too?

    • LD


      I am not a lawyer nor a financial planner. I would encourage you to contact your federally elected representatives (both Congress and Senate) and also Congressman Darrell Issa who heads the Oversight and Government Reform Committee. To be frank I would not necessarily hold your breath.

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