Saturday, December 25, 2010

Ownership of the Federal Reserve Bank

An anonymous poster asked me about the ownership of the Federal Reserve Bank and without doing a lot of research I found an interesting post by Professor Edward Flaherty of the University of Charleston.  Flaherty debunks the claim that foreigners or the Rothschilds control the Fed. That is silly.  But equally silly is Flaherty's claim in the following sentence:

"The New York Federal Reserve district contains over 1,000 member banks, so it is highly unlikely that even the largest and most powerful banks would be able to coerce so many smaller ones to vote in a particular manner. To control the vote of a majority of member banks would mean acquiring a controlling interest in about 500 member banks of the New York district. Such an expenditure would require an outlay in the hundreds of billions of dollars. Surely there is a cheaper path to global domination."

While coercion is a loaded term, Flaherty displays a lack of understanding of basic political and interest group processes.  Typically, democratic processes yield a small number of controlling or influential parties.  Robert Michels first called this process the iron law of oligarchy in a book on political parties (specifically the Socialist Party of Germany, which at the time was considered highly democratic) and it has been examined by Mancur Olson on the public policy level in his book Rise and Decline of Nations.  


While it is silly to claim that the Rothschilds or some cabal of Jewish or British bankers controls the Fed, it is equally silly to claim that the big money center banks do not influence monetary policy.  Since 2008 we have witnessed Goldman Sachs largely dictate national spending policies.  Flaherty's claim that ordinary political processes do not apply and that the large banks lack influence on the nation's monetary policy, given the trillions of dollars just printed and handed to them, is wrong. 


Monetary policy favors the commercial banks and by definition the big commercial banks get the most juice from the Fed's monetary expansion.  That doesn't mean that there's a conspiracy of international bankers, Jewish, British or otherwise, nor does it mean that there is a a conspiracy of big US banks.  It just means that money center banks control a disproportionate share of a monetary system that is designed to subsidize banks in general. The bigger banks benefit more than do the smaller banks, and they do more damage because they tend to be more speculative. The Mexican and Latin American debt crisis; the Hunt silver speculation; Enron; Long Term Capital Management; and the sub-prime crisis as well as the century old merger mania that has reduced American business's creativity are all due to the money center banks.

The banks and financial interests benefit and you lose. That is built into the system that American voters have supported.  If you insist on voting for one of the two major parties every time, you are supporting the system.  Voters have themselves to blame, not a conspiracy. 

17 comments:

Anonymous said...

I am so confused, besides being ignorant. So is Ben Bernanke elected by the banks to be the Chairman of the Federal Reserve Bank?

Doug Plumb said...

Mitch, see the Grace Report commissioned by Ronald Reagan, recall that Reagan was also shot.

I've seen bits of it, relevant to this case it shows a table of the Fed Board of Directors (not governors) - the usual suspects in conspiracy theories - Rothchilds, Rockefellers, Warbergs, etc.

Also, Aristotle "The Politic" states that an oligarchy has and will always exist. If this is true today, they must be the controllers of the banks.

Mitchell Langbert said...

Dear Anonymous: No. The way Congress chartered the Fed the president appoints the chairman. So it's a political job. I believe that the chairmen of the regional Feds and the boards of governors (there are both regional and a national board, I recall) are also political appointees. I believe that the banks have representatives on the boards too. As well, they interact heavily with the boards and the chairmen. If I'm not mistaken, a decent percentage of the board members come from Wall Street and finance. Much like any regulatory agency in Washington, the Fed interacts heavily with the people it regulates. The formal chain of command coincides with informal political relationships. The people doing the day to day work are Fed employees.

Mitchell Langbert said...

Dear Anonymous: This is from the Wikipedia entry on the Federal Reserve System:

The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous other private U.S. member banks and various advisory councils.[7][8][9] The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time. The division of responsibilities of the central bank falls into several separate and independent parts, some private and some public. The result is a structure that is considered unique among central banks. It is also unusual in that an entity (the United States Department of the Treasury) outside of the central bank creates the currency used.[10]

According to the Board of Governors, the Federal Reserve is independent within government in the sense that "its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government." However, its authority is derived from the U.S. Congress and is subject to congressional oversight. Additionally, the members of the Board of Governors, including its chairman and vice-chairman, are chosen by the President and confirmed by Congress. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system's highest-level employees. Thus the Federal Reserve has both private and public aspects.[11] The U.S. Government receives all of the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. The Federal Reserve transferred a record amount of $45 billion to the U.S. Treasury in 2009.[12]

Anonymous said...

If I understand your last blog entry, the banks do not own the Federal Reserve. Am I correct in making this statement?

Mitchell Langbert said...

The member banks own the Fed but it is created by federal law and the president appoints the board of governors and the chairman. The two websites below give a rough outline. Much of the policy is set by the 12 regional boards and bankers are represented on the regional boards. The board of governors, appointed by the president, oversee the regional boards. We can suppose that there is considerable politics dominated by insiders, i.e., the bankers. Also, the public appointees are probably Fed (bank) friendly or are indifferent and can be easily manipulated.

http://www.federalreserve.gov/pubs/frseries/frseri.htm


The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms.

http://www.frbsf.org/publications/federalreserve/fedinbrief/organize.html

District Directors

Each of the 12 Reserve Banks has a board of nine directors. Each Bank's president is appointed by its board of directors and approved by the Board of Governors in Washington, D.C. Reserve Bank directors oversee the operations of their Bank and are subject to the overall supervision of the Board of Governors. The nine directors of each Reserve Bank are evenly divided into three classes, designated A, B, and C. Class A directors represent commercial banks that are members of the Federal Reserve System. Class B and Class C directors represent the public interest and cannot be officers, directors, or employees of any bank. Class B and Class C directors encompass the broad economic interests of the District, including industry, agriculture, services, labor, consumers, and the nonprofit sector. Class A and Class B directors are elected by member commercial banks in the District. Class C directors are appointed by the Board of Governors.

Anonymous said...

The member banks own the Fed but it is created by federal law and the president appoints the board of governors and the chairman.

I fail to understand how banks own the Federal Reserve. Please explain.

Mitchell Langbert said...

The Fed is a corporation. Ownership of a corporation is vested in shares of stock. When banks join the Federal Reserve they are required to subscribe to the Fed's stock. Therefore they are the owners. There is no ownership other than the member banks'.

It is true that the President of the US appoints the chairman and the board of governors, but that does not change the ownership structure. In comparison, in Germany and other European countries, all corporations with more than a few employees are legally required to appoint board members who are elected by the employees. Other board members are elected by shareholders. That doesn't change the ownership of the company. The employees do not own it because they elect a a share of the directors.

Nor does the public own the Fed. It is owned by its shareholders and is a private concern although it is legally required to have a chairman appointed by the President. The shareholders own the Fed just like shareholders of German corporations like Siemens own the firm, not the employees.

To quote the San Francisco Fed at
http://www.frbsf.org/publications/federalreserve/fedinbrief/organize.html

"Each member bank is required to subscribe to stock in its regional Federal Reserve Bank, but holding Federal Reserve stock is not like holding publicly traded stock. Reserve Bank stock cannot be sold, traded, or pledged as collateral for loans. As specified by law, member banks receive a six percent annual dividend on their Federal Reserve Bank stock; member banks also vote for Class A and Class B directors of the Reserve Bank."

In the case of the Fed, the member banks elect the class A regional chairs. In turn five of the 12 members of the Federal Open Market Committee (FOMC) are regional chairs.

The FOMC is the most important committee in the Fed. It determines monetary policy. The board of governors oversees it, but the board of governors is on the FOMC along with five regional chairs. The head of the New York Fed is a permanent member of the FOMC while 4 other regional heads rotate. The banking industry thus brings 5 of 12 votes to the FOMC meeting. I wonder how many of the remaining 7 (the board of governors) are independent of the banking system.

The member banks own the Fed but it is created by federal law and the President appoints the board of governors and the chairman.

>I fail to understand how banks own the Federal Reserve. Please explain.

Mitchell Langbert said...

Dear Anonymous; I'm thinking about why you find it difficult to grasp the banks' ownership of the Fed and it occurred to me that you might not know what the term "stock" means. Although it's a commonly used word many people don't understand it.

Stock is just a share of ownership. All private corporations, like the Fed, must issue stock as part of their charters. The stock reflects ownership. If someone owned all of the stock in the corporation, then they would own the entire corporation. In the case of the Fed, each bank subscribes to shares of stock. By owning the stock they therefore own a portion of the Fed.

All corporations are regulated by law. For example, all corporations that are publicly traded must disclose how much they pay their top five officers to the public. That does not mean the shareholders do not own the firm. Similarly, the fact that the charter requires the president to be appointed does not change the fact that the Fed's shareholders own the Fed.

Anonymous said...

Here is my source of confusion:

Stock is just a share of ownership. All private corporations, like the Fed, must issue stock as part of their charters. The stock reflects ownership. If someone owned all of the stock in the corporation, then they would own the entire corporation. In the case of the Fed, each bank subscribes to shares of stock. By owning the stock they therefore own a portion of the Fed.

If they own a portion of the Fed then they must also have the right to vote for the Board of Governors etc. Yet Ben Bernanke was not elected by the banks, but as you correctly point out was appointed by the President and confirmed by the Senate. As you also correctly point out the Board of Governors are also political appointments, not elected by the stock holders (aka the banks). So the "banks" cannot appoint the Chairman or the Board of Governors. Is this ownership?

Mitchell Langbert said...

The banks themselves proposed this structure and have been happily flourishing with it for many decades.

Let me ask you seven questions.

(1) Can you name one major issue on which the Fed went against the wishes of the major money market banks?

(2) Do you know anyone who can answer question (1)?

(3) Have you ever heard the media ask question (1)? If not, do you believe that the public or the elected politicians oversee the Fed?

(4) How much money does the banking system provide to the federal government each year by holding treasury bonds?

(5) Given the heavy indebtedness of the federal government to what degree do you think that they are eager to question what the Fed does?

(6) Given questions 1-4, do you seriously believe that the legal appointment and ownership structure of the Fed is particularly important?

(7) Do you think that the Fed has ever had the public interest in mind? If so, what evidence can you produce?

I can produce a lot of evidence that the Fed has never had the public interest in mind and has continuously funded Wall Street. Hence, the effective ownership is exactly as the share ownership suggests, in the banks' hands.

Anonymous said...

The correct way to phrase your position is:

The Federal Reserve does the bidding of the commercial banks.

Mitchell Langbert said...

No, you still aren't getting the concept of stock. The fact that the banks own all of the stock means that they own the Fed.

One of the basic principles of corporate governance is that corporations must be managed in the interests of stock holders. That is crucial to understanding the relationship between a corporation and its shareholders. Because the charter defines the relationship of banks to the Fed as shareholders the Fed has a legal, FIDUCIARY relationship to the banks. That means that if the chairman or the board of governors do not disclose information to the banks, act in good faith to the banks and further the banks' welfare through operation of the Fed they are BREACHING FIDUCIARY DUTY.

Now, let us compare the fiduciary relationship that the Fed chairman, though appointed by the president, has toward the owners of the Fed, and the Fed's relationship to Congress and the public.

One of the fundamental principles of ownership is the right of the owner to material and vital information. Trustees, for example, are required to disclose the amount of money in a trust to the beneficiaries.

To strengthen this requirement in the case of public corporations, Congress has required that all publicly traded corporations publish audited financial statements. As well, they must disclose the compensation of the top 5 executives and any trades that (I think) top 25 executives make in the firm's stock.

Recently, Ron Paul proposed a law that the Fed should be subjected to an audit that would be made public. Congress voted it down.

Now, what kind of owner would vote against disclosure of the managers' operation of the asset that he owns? If Congress and the public really thought anything other than that the banks own the Fed, they would have required that the Fed be audited because the Fed would be owned by the public.

But it is not, it is owned by the banks. The power to appoint a chairman is not the determinant of ownership. Ownership of stock is because the stock ownership creates a fiduciary relationship between the stock holders and the managers.

From an economic standpoint, Let an objective source, the famous economist Kenneth Boulding, define ownership of a security: (Kenneth E. Boulding, "Economics as a Science", p. 60):

"A financial instrument such as a share of stock, a bond or a promissory note creates, on the part of the owner, an expectation of receiving something in the future...A deferred exchange can usually be regarded as a combination of two transactions: an immediate exchange, usually of money for a financial instrument...which is consummated when the promise implied in the financial instrument is fulfilled."

Now, why would banks subscribe to shares in the Federal Reserve Bank, and why would the term that the Fed and the banks use to describe the instrument be "shares of stock"? Why not "security" or "loan"?

The answer is that, just as Boulding suggests, there is an ordinary fiduciary relationship associated with the stock.

JeremyKilroy123 said...

You guys say oh well the president appoints the governor of the Fed. So it can't be corrupt. Who do you think gives both sides the most money on the president that is going to be elected. It is the banks that are the biggest contributors most times for the election of presidents. Who do you think his true master is it is the banks he owes his power to the banks his biggest contributors. Not to mention most presidents are indoctrinated usually into some sort of secret society which they also owe allegiance too. Whether it be bohemian groove, bilderberg or skull and bones or Freemasonry.

JeremyKilroy123 said...

I see lots of people saying that it isn't corrupt because the president appoints the current chairman of the FED. But the banks are the ones that give the most contributions to both sides. So who do you think the president owes his allegiance too. It is the bank that financed his campaign.

Anonymous said...

I see lots of people saying that it isn't corrupt because the president appoints the current chairman of the FED. But the banks are the ones that give the most contributions to both sides. So who do you think the president owes his allegiance too. It is the bank that financed his campaign.

Jeremy said...

I see lots of people saying that it isn't corrupt because the president appoints the current chairman of the FED. But the banks are the ones that give the most contributions to both sides. So who do you think the president owes his allegiance too. It is the bank that financed his campaign.