The Federal Reserve System refers to the United States central bank which was established back in 1913. Most people prefer to call it fed, but this is in local slang language. Prior to its formation there were frequent financial set backs in the economy that were experienced from the year 1907.
The fed was invented by the legislature as the solution to US financial problems. This paper focuses on the criticism that has been directed towards the Federal Reserve and tries to analyze the truth behind the allegations.
The Federal Reserve has various obligations that include monitoring and controlling monetary institutions. Secondly, the reserve is responsible for sustaining the strength of the monetary system. Additionally, the Federal Reserve offers monetary services to the federal government, international foreign missions, and depository organizations. Furthermore, the Federal Reserve is also responsible of carrying out the financial policy of the US.
According to Irwin (2010), the reserve is run by the Federal Reserve board and its members are selected by the president. However, the Federal Reserve is free from the president but again the decisions that regard it have to be verified by the congress.
In ancient days there was acute shortage of money and that’s why the Federal Reserve was established to ensure that there is adequate currency revolving in the US economy. Besides, it would be risky if the banks were allowed to do their operations without being answerable to any body hence the Federal Reserve has a mandate of safeguarding the interests of the general public.
Whenever an urgent situation occurs such as during the recent recession period when most organizations were exiting the markets, it is the Federal Reserve that came to the rescue of the US economy by offering subsidies to the various organizations that were adversely affected by the recession.
Before the subsidies were issued companies were retrenching their employees in large numbers. This recession was felt all over the world because it’s perceived that the US being a super power influences world economies.
The Federal Reserve supplies cash to monetary institutions so that the banks are able to offer loans to their clients while at the same time retaining their money in store. If the Federal Reserve declined to supply the funds to the depository units the banks would not be in a position to offer loans. The reserve has been experiencing a lot of pressure because most people feel that its activities are not transparent.
This is because some financial organizations have been permitted to posses stocks in the money market and thus it implies that its biased owing to the fact that majority of these banks are privately owned. It would have been better if the public owned banks were also given the same opportunity hence this behavior results in unfair competition.
One of the issues that have been raising eyebrows is the party that possesses the Federal Reserve, because according to the act of Federal Reserve it’s not possessed by the federal government hence most people have found the statement that is printed on the notes to be confusing.
Moreover, the term reserve does not make sense because in reality the Federal Reserve has very little cash in store because most of its cash is in form of metals. One wonders how such a reserve exists because you can not offer what you lack. There is no way a reserve can be able to circulate money in the economy when it only has less than 4% of its money in cash.
Furthermore, some of the reserves committees have been operating their businesses behind closed doors. This implies that something fishy has been going on because if the deals were genuine they would have been done in the lime light. Most activist have been blaming the reserve bank for the recent money shortages because they are thought to be induced hence they are not natural. When these shortages occur the people who reap while others are loosing are the few rich people.
It’s amazing to know that America experiences shortages while it is able to offer financial grants to developing countries. This is an insult to the American people because you can not donate to others while you have not satisfied your own needs. When the supply of cash reduces commodity prices goes up and since the earnings don’t increase with these sudden changes, it is the common people that suffer during recession because they can hardly pay their bills.
The impression created by the above statements is that the members of reserve system are pocketing the proceeds that they are getting from the dubious deals. In fact there have been allegations of money laundering because there are individuals who are thought to have obtained loans from the reserve and what bothers most people is that their names were withheld.
This suggests that when the loans will be repaid that money will end up in individuals pockets. This is why critics have been pushing for official auditing of the reserve’s financial records. According to the constitution of US, publicly owned entities are under obligation to prepare their own financial statements before they invite independent auditors.
Auditing does not guarantee transparency in the reserve because if the officials are able to induce shortages how sure can we be that they will not use their money to induce the independent auditors to cover up their offences (O’Driscoll, 2010).
Most critics argue that the lack of transparency within the reserve is due to the personality of the officials that were selected to spear head the reserve board.
Some of them are thought to have committed crimes in the past hence when they were assigned to the board they used their authority to obtain money illegally. According to the Federal Reserve act, any one that is found guilty of squandering money should be imprisoned for a period of not less than thirty years.
The issue concerning the acquisition of Federal Reserve was intended to belong to the public but owing to the divisions in the congress the motion was not passed. But ownership should not be a problem because the misappropriation of funds is not affected by ownership.
It would be important to consider establishing an independent body to oversee the activities of the reserve. In sincerity, the progress of the economy is reflected on the supply of funds in the economy. Stable economies have low commodity prices and low unemployment rates.
The recent amendments state that the audit reports of the reserve should be presented to the congress for approval. This is because the congress represents the people and that’s way it is possible to end impunity in the reserve. Most people feel that the reserve has failed the American people and it’s blamed for the continued rise in public debt.
This is due to the fact that when the artificial shortages happen the authorities have to obtain money from lenders which come with interest rates. The shortages can be avoided if financial institutions were under strict instructions to retain physical cash rather than being permitted to convert their cash into other forms such as metal.
When clients withdraw their savings in large amounts the bank suffers from inadequacy because most of its money is not in cash and most of their cash is not in monetary value because some of the debts are not paid back in money hence they are converted into assets such as houses and the houses can not be sold overnight.
Most banks like storing huge amounts of their clients’ money in form of valuable metals because they have this notion that prices of precious metals will shoot up drastically. This behavior means that the reserve is a business within business. Considering that when the metals are traded they bring more income compared to what the initial value was purchased at hence a few extra dollars will bring a few dollars in return.
I would compare this behavior to a scenario where a livestock farmer relocates one of his/her calves to another farm and the owner of new farm takes advantage of the situation by taking the manure into his own farm instead of living it to the owner.
When banks encounter shortages they resort to selling their possessions such as cars and houses to acquire the money that is soon to be withdrawn by their clients. Alternatively, they can request fellow banks to offer them some money to cover up their shortages. But selling the properties is the most appropriate action in such a situation because properties within real estate never depreciate unlike cars that are resold at throw away prices.
The major challenge to the banks that are looking for money lenders is that if the problem is affecting their sister banks its too bad for them because you can never offer what you need the most. In the final end clients would have to be limited on their withdrawals because with time the money reserve of the bank in question will run dry.
Perhaps the reserve keeps a small amount of cash because it does not have many uses with cash and since the cash itself does not appreciate in value that’s why reserve officials store the cash in form of cash because that way they will only consider their financial requirements.
White (2005) argues that it would be advisable if a specific amount that is enough to sustain the American people was stored in cash and the surplus converted into metallic value. That way shortage will be history because the money in store can be released to deal with the inadequacy.
When commodity prices are low people would require less money to purchase items hence they would not withdraw a lot of money. For this point to be implemented the government would have to reduce the taxes levied from manufacturers.
In essence, for the value of American currency, the government needs to encourage foreigners to consider starting businesses in the US because by doing so the demand for US currency would go up because many people would require it. This is because currencies with the highest demand in the business world are the ones that are involved in foreign trades.
Therefore, selection of board members into the Federal Reserve System should be done at the grass root level back in the regional banks and the officials should be elected by the people. The people should be given powers to recall board members who don’t perform according to their expectations. Besides, the candidates should be people of good personality.
References
Irwin, N. (2010). Federal Reserve Earned $45 billion in 2009. The Washington Post. Web.
O’Driscoll. Jr., G.P. (2010). An Economy of Liars. The Wall street Journal. Web.
White, L.H. (2005).The Federal Reserve System’s Influence on Research in Monetary Economics. Econ Journal Watch 2 (2):325-354.