Fed to the rescue
On this day in 1914, the Federal Reserve Bank (the “Bank”) officially opened. The Bank is actually a network of 12 regional Federal Reserve Banks that constitute the Federal Reserve System, collectively our nation’s central bank. After a series of financial panics and bank runs in the late 1800’s, the Panic of 1907 led to the Federal Reserve Act of 1913, displacing J. P. Morgan from personally acting as the nation’s de facto central banker.
The Federal Reserve Banks were created under a unique structure that balanced the interests of the US Government and its notional shareholders – its member banks comprised of all nationally chartered and many state-chartered banks. As a result, it is deemed both a government entity whose excess profits accrue to the US Treasury, and yet legally considered a unique private corporation whose peculiar non-voting, non-tradeable common stock is owned by its member banks who deposit their reserves while receiving dividends. Its decisions remain independent of the President and Congress and it functions without congressional appropriations.
One of its most crucial functions is providing liquidity to member banks, but it also serves as a clearinghouse between banks, issues currency, issues federal debt and conducts open market activities.
While the public appears to continually express frustration at the actions or inaction from the Fed, and many in the cryptocurrency universe express distrust of the notion of central banking altogether, there can be no doubt that we survived recent financial crises much better as a result of Fed actions, averting massive unemployment and systemic financial collapse that could have swept much of the banking industry into insolvency along with the businesses that rely on their access to capital.
Prior to the 2008 Great Recession, the Federal Reserve Bank’s balance sheet was approximately $800 billion for a prolonged period. It spiked to $2 trillion in 2008 to address the crisis and stabilized around $4 trillion up until 2020 pandemic. To combat the pandemic economic dislocation, Fed activities increased its balance sheet to an unprecedented $9 trillion, roughly where it stands today as it exits quantitative easing.
One can debate if the interventions during the pandemic were too much, or the interventions of the Great Recession, or for that matter, the Great Depression, were too little. The dual mandate of stabilizing prices while maximizing employment creates a balancing act that may seldom achieve universal satisfaction.
However, its other duties of maintaining the stability of the financial system and regulating and providing liquidity to banks should not be overlooked. Those that lost their offshore deposits last week in the FTX implosion may even be recalibrating their views on the necessity of financial regulation and central banking.
