Module 26: The Federal Reserve System: History & Structure

Module 26 Essential Questions

1. What is the history of the Federal Reserve System?

2. What is the structure of the Federal Reserve System?

3. How has the Federal Reserve responded to major financial crises?

Who monitors banks and the money supply?

Central Bank

The Federal Reserve System

Mostly calm with moments of sheer panic

Creation of the Federal Reserve System was in response to times of crisis

The Fed: A 21stCentury American Banking System

Crisis in American Banking at the Turn of the Twentieth Century

• Money Supply Tug-of-War

• Trusts

• Speculation

• Pyramid Reserves

• Knickerbocker Trust

• J.P. Morgan Saves the Day

Responding to Banking Crises: The Creation of the Federal Reserve

•Frequent Bank Crises

•National Banking System Eliminated

•Centralized Control of Bank Reserves

•Federal Reserve’s Money Monopoly: the sole issuer of currency

The Structure of the Fed

The 2 Part Structure of the Fed

Board of Governors • Oversees the entire system from offices in Washington, D.C.• Operates like a government agency: 7 members appointed by the

president & must be approved by the Senate.• Appointed for 14-year terms (to insulate them from political pressure in

their conduct of monetary policy)• The chairman is appointed every 4 years, but it is traditional for the chair

to be reappointed and serve much longer terms.•  12 Regional Banks• 12 Federal Reserve Banks each serve a region of the country, providing

various banking and supervisory services. • Each regional bank is run by a board of directors chosen from the local

banking and business community. • The Federal Reserve Bank of New York plays a special role: it carries out

open­­-­­market­operations, usually the main tool of monetary policy.­• Decisions about monetary policy are made by the Federal Open Market

Committee, which consists of the Board of Governors plus five of the regional bank presidents. The president of the Federal Reserve Bank of New York is always on the committee, and the other four seats rotate among the 11 other regional bank presidents.

• The chairman of the Board of Governors normally also serves as the chairman of the Open Market Committee.

The Effectiveness of the Federal Reserve System

Creation of the Fed didn’t stop bank runs and it didn’t stop the Great Depression. A series of economic downturns and damaging bank runs instigated new laws from Congress that attempted to stabilize the banking industry and provide safeguards for the public and their deposits. (Ex. Glass-Steagall Act of 1932) However, when the Great Depression became a distant memory and bank runs became much less common, Congress let some of the regulations of the 1930s lapse…

Some of these legal lapses created problems in the 1980s and in 2008.

The Savings and Loan Crisis of the 1980s

•Savings and Loans (Thrifts)

•Inflation’s effect on the S&Ls

•Speculation

•Political Interference

•Tax-Payers

•Comprehensive Oversight

Back to the Future: The Financial Crisis of 2008

•Similarities to previous crises

•Long-term Capital Management

•leverage

•balance sheet effect

•vicious cycle of delevereaging

• Subprime Lending and the Housing Bubble

• subprime lending

• securitization

• TED Spread

Back to the Future: The Financial Crisis of 2008

• Crisis and Response

•Fed balance sheet

•Bear Stearns v. Lehman Brothers

•Capital Injections

•The future?

Back to the Future: The Financial Crisis of 2008

Module 26 Review Questions p. 260

Read Module 27 p.262-266