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OpEdNews Op Eds    H3'ed 7/8/14

The Fed Is Not the Problem

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The Federal Reserve
The Federal Reserve
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KPFK radio's Guns and Butter program recently broadcast a fascinating interview with Catherine Austin Fitts, an investment banker who has served as the Assistant Secretary of Housing and the Federal Housing Commissioner at the U.S. Department of Housing and Urban Development. She talked about a lot of the things that have been going on behind the scenes in the financial industry. She explained a lot of things that ordinary people need to know about how corruption of the mortgage industry caused the crash of 2008. However, she said three things that struck me as misleading or simply untrue: that the Federal Reserve is "privately owned," that corruption is not the problem, and that the real problem is that we have a "shadow government." In reality, the Federal Reserve System is a public institution, created and overseen by Congress. Corruption is and always has been the problem. And we are not being ruled by a shadow government. Our out-in-plain-sight government is simply staffed by people who were hand-picked by the richest people in the country. Often, those staffers rotate from public office to working for the major corporations and then back to public service. Once you understand those simple facts, the solution to our financial problems becomes clear: send men and women who actually care about ordinary people to Congress.

The Federal Reserve System is the central bank of the United States. All industrialized nations today have a central bank. The existence of a central bank, per se, is not a problem. In fact, a central bank can help to create a climate of financial stability that benefits the general public. However, the central bank may cause problems if the rules that govern it are bad or if the people running it are inept, corrupt, or simply unfair. Fortunately, those problems are easy to solve.

The Federal Reserve System was created by legislation passed by Congress and signed into law by the President. The Federal Reserve System must follow laws passed by Congress and signed by the President. It is run by a Board of Governors whose members are appointed by the President and confirmed by the Senate. If a member of the Board of Governors betrays the public trust, he or she can be removed from office in one of two ways: he or she can be impeached by the House of Representatives and tried in the Senate or simply removed from office by the President.

"The Fed" is the subject of many conspiracy theories. Most of them are based on simple misunderstandings. One misunderstanding is the idea that "the Fed" is privately owned and privately controlled. That's simply untrue. The Federal Reserve System is a federal institution that consists of the Board of Governors (a federal agency) and twelve regional Federal Reserve Banks. Many people believe that these regional Federal Reserve Banks are privately owned corporations. But in reality, they are tax-exempt federally created instrumentalities. However, the regional Federal Reserve Banks do have some of the features of a private corporation. For example, a regional Fed can be sued for damages under the Federal Tort Claims Act, as if it were a private corporation.

Some people argue that "the Fed" is privately owned, but it really isn't. To understand why, you must understand the difference between the 12 regional Federal Reserve Banks and the member banks of the Federal Reserve System. If you want to set up your own private, for-profit bank, you must first get a license called a banking charter, which establishes your bank as a corporation and sets some of the ground rules for how your bank will be run. You might get your banking charter from your state government, in which case yours will be a state bank. Or you might get your banking charter from the Office of the Comptroller of the Currency in the U.S. Department of the Treasury, in which case yours will be a national bank. If you decide to set up a national bank, that bank will automatically become a member bank of the Federal Reserve System. (Some state banks that meet certain basic requirements can also be member banks of the Federal Reserve System.) Member banks of the Federal Reserve System must hold at least 3 percent of their total capital in the form of shares of stock in their regional Federal Reserve Bank.

So if you own a bank that is a member bank of the Federal Reserve System, then at least 3 percent of your capital in that bank will be in the form of shares of the regional Federal Reserve Bank. But those shares are not like ordinary shares of stock. You cannot sell them or use them as collateral for a loan. Nor would the ownership of those shares give you much influence over that regional Federal Reserve Bank. Each regional Fed is overseen by a nine-member board of directors. The member banks get to elect six of those members, three of whom must not be an officer, director, or employee of any bank or other financial institution. The Board of Governors of the Federal Reserve System gets to appoint the other three members. A regional Fed's board of directors is similar to a corporate board of directors. But instead of making the corporation serve its stockholders, a regional Fed's board of directors is supposed to ensure that the banking system is serving the public.

State and national banks are subject to a confusing mixture of federal and state banking laws. Federal laws are passed by the House and Senate and signed into law by the President. Similarly, state laws are passed by the state's legislature and signed into law by the state's governor. If the banking system is not serving the public, the problem is not in some "shadow government." It's out in plain sight in the regular government. The executives of the major banks used their money and influence to help their friends get elected to public office. Those "public servants" can look forward to high-paying jobs in those major banks after they leave office. This revolving door between government and the financial industry probably explains why none of the "C-level" executives (CEO, COO, CFO) from the major financial institutions have gone to prison for any crimes leading to the financial crash of 2008.

The financial system and the laws that regulate it are complicated. However, problems in the financial system boil down to two basic but interrelated kinds of problem: bad laws and bad people. If the laws are bad, a good legislature can fix them. If members of the Board of Governors are misbehaving, Congress or the President can fire them. If we have good laws that are simply not being enforced, then someone in the executive branch needs to be replaced. So the solution to these complicated problems is simple: elect people who care more about the general population than they care about the people who own the banks. Yet as long as voters believe that we are being ruled by a "shadow government" whose activities cannot be observed or influenced by the general public, they will not bother to elect better people to the real government. So in other words, the Fed is not the problem. The problem is that the wealthy are using their money to get the political system to serve them, while the general public is not using its power of numbers to get the political system to serve the general public. As Walt Kelly's character Pogo once told us, "We have met the enemy, and he is us."

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Laurie taught herself to read at age 4 by analyzing the spelling of the rhyming words in Green Eggs and Ham, by Dr. Seuss. She has worked as an editor in medical and academic publishing for more than 25 years. She is the author of five books: (more...)

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