Wednesday, December 29, 2010

Understanding Ownership of the Fed

A reader has been communicating with me about the ownership of the Fed. He or she points out that the President and the Congress have the right to appoint the chairman and board of governors of the Fed.  Therefore,  the member banks' subscription to Fed stock does not mean that they own the Fed.  Power, in this view, is the President's, Congress's and the public's.

This argument overlooks the implications of stock ownership.  By definition, ownership of stock in a corporation constitutes ownership of the corporation.  It is true that the President's appointment of the board of governors and the chairman modifies some implications. However, there is another point that is more important. The stock ownership creates a fiduciary relationshipAny corporation must be operated in its owners' interests.  Therefore, calling the member banks' holdings in the Fed "stock" rather than "loans" or "subscription fees" suggests that the framers meant to vest the crucial aspect of ownership in the banks, namely, that the Fed should be operated in their interest and not the public interest.

Bankers work with trusts all the time.  The basic relationship of banks to their depositors is fiduciary. Hence, they instinctively understand what the reader has trouble accepting, that appointment of a trustee on behalf of a beneficiary does not change the beneficiary's underlying ownership. The appoint of a guardian for a minor orphan's assets does not change the orphan's owning the assets.  Likewise, the president's appointment of a Fed chairman does not change the fiduciary relationship the Fed bears to its stockholders, the commercial banks.

Recently, Congress voted down Ron Paul's bill that would have required public audits of the Fed. This is significant evidence that Congress and the public have never believed (to believe that two groups of knuckleheads have any beliefs at all on the subject) that the Fed serves the public interests.  What owner would refuse information about his assets?  One of the fundamental rules about trusts is that the trustee must disclose all relevant information. That Congress does not want the information means that Congress does not think it or the public would benefit from the information.  Hence, Congress and the public do not think that they are the Fed's beneficiaries.


Anonymous said...

What do you mean by this statement?

The stock ownership creates a fiduciary relationship. Any corporation must be operated in its owners' interests. Therefore, calling the member banks' holdings in the Fed "stock" rather than "loans" or "subscription fees" suggests that the framers meant to vest the crucial aspect of ownership in the banks, namely, that the Fed should be operated in their interest and not the public interest.

Mitchell Langbert said...

1. Any corporation has owners, those who own the stock.

2. In most cases, the owners appoint managers. In the case of the Fed, the President and Congress appoint the managers.

3. The managers have a legal duty of trust, called a fiduciary duty, to manage the corporation in the shareholders' interests. Unless the Federal Reserve Act says that this duty does not apply, it will apply.

4. The notion of fiduciary duty is applied to trustees who manage trusts on behalf of beneficiaries as well as to pension fund managers who manage pension funds on behalf of employees. It applies to managers of corporations and to people who manage mutual funds on behalf of contributors and bankers who manage deposits on behalf of depositors. In some of these cases the beneficiary appoints the managers, in other cases the beneficiary does not and may not even know who the managers are.

5. Officers of corporations owe a duty of trust, that is, a fiduciary duty, to the owners, the shareholders or stockholders (the term fiduciary comes from the Latin word for trust, as in "fidelity")

6. Some of the aspects of fiduciary duty include:

--managers have a duty to disclose material information
--managers have a duty of loyalty and not to disclose trade secrets
--managers have a duty not to use their position for their own benefit or to harm the beneficiaries or shareholders

7. By calling the Federal Reserve Bank a corporation with shareholders Congress established a set of legal relationships between the managers, who are appointed by the President of the United States and the owners, the banks that own the Fed (they own it because they are the shareholders).

8. Regardless of whom the President appoints, the duty to act on behalf of the owners remains. That is so even though the Fed has several mandates to serve the public. Unless Congress passed a law saying that special fiduciary rules apply to the Fed, the governance of the Fed must contemplate the owners' benefit. That is the nature of the corporate form of organization.

Hence, 9, your claim that the President's appointment of the governing body is decisive in understanding it is overblown. The key is the ownership of stock, which is a powerful relationship. It creates fiduciary duty on the part of the committees that run the Fed to the banks.

Doug Plumb said...

Do you believe the Fed has a board of directors ? If so, who are they ?

Don't all corporations have directors or boards of directors ?

Its my understanding that the board of directors creates policy, the board of governers implement this policy. The board of directors is hidden, the board of governors is not.

Mitchell Langbert said...

My understanding is that the board of governors plays the ordinary role that a board of directors would play in conventional corporations. The most important committee from the public's standpoint is the Federal Open Market Committee which determines monetary policy. I'm not an expert though.