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The Federal Reserve System

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Federal Reserve Bank

“The only limit to a commercial bank's ability to discount is the limit to good commercial paper. . . . Such paper springs from seli-clearing transactions. ... It is the duty of the banker to discount freely for his customer in a crisis or panic. . . . The only limit... is the limit to good commercial paper. ... The whole purpose of the Federal Reserve Act is to enforce this practice.
-Rep. Charles Korbly (1913)” (Timberlake, Richard, 134-5)

For the past decade, the Federal Reserve Bank has been the point of attack of a lot of people criticizing the US economy. Some people think that because of the Federal Reserve Bank this county is bad economically. And other people say the contrary defending the Federal Reserve Bank. Economists and politicians also debate on this topic whether the Federal Reserve Bank has a positive impact in the US economy or not. Despite all of the economic problems that this country is going through, the Federal Reserve Bank is a good thing to have. Why is it good? Because it is vital to the financial system, it helps regulate payments and settlements between banks and it regulates commercial banks, and creates monetary policies. These are a few reasons to why it is good to have a Federal Reserve Bank.

The Federal Reserve Bank, also known as the Fed, has been a vital part of the financial system for almost 100 years. The Fed is broken down into 12 districts or Reserve Banks. These 12 Reserve Banks have branches in specific states in which they serve. Each district funds its own operations primarily on interest on its loans and the securities it holds. Also, the Fed controls the U.S. money supply by selling and buying treasury bonds in the open market. It keeps inflation in check and employment high and keeps track of other dangers in the market that could affect the economy (White, Lawrence). But, the main purpose of the Fed’s creation is to carry out the policies of the Federal Reserve System.

The Fed mediates between banks so there will not be any problems. They help regulate payments and settlements between private and/or government banks. The Fed is involved in every single transaction that takes place as a method of security of their customers, the banks, and the government. Also, the Fed regulates commercial banks. The Fed examines the commercial banks’ balance sheets to see if they have sufficient funds for their day-to-day obligations. These obligations consist of loans, credit cards, mortgages, bonds, insurance, and other financial functions.

Without the Federal Reserve Bank, we would not have anyone to impose regulations on banks nor the creation on monetary policies that the Federal Reserve System requires. These policies and regulations required by the Federal Reserve System are followed by every financial institution around the US. The Fed established the level of the “fed fund” rate, the interest rate at which banks borrow money from each other (White, Lawrence). They are the one who raise or lower short-interest rates to keep the market stable. They are also the ones who run the US payment system. Also, these regulations are meant to help the US currency which is the dollar ($), to be the number one currency around the world. One example of this would be that other reserve banks from other countries have their savings in dollars because the dollar is the stronger currency around and is the most common currency that circulates around the world. These reasons are why the Fed is important for our government and for us. This is the key to a stable economic nation.

These are some facts to why it is good to have a Federal Reserve Bank to regulate the financial stability. The Fed is free from political pressure and is free to make any policy decision based on economic conditions and the best available data on economic performance. For example: if inflation rises faster than expected, the Fed may sell government bonds to take money out of circulation or raise short-term interest rates. This is why banks increase long-term rates, and this reduces access to credit and consumer spending reduces. Now a day, prices may be high, but that is to keep the market stable. Stable prices mean keeping the inflation low and all these relate to consumer spending. The less we consume, the more stable the market will get, and employment will rise in the future.

On the other hand, people assume that the financial crisis of 2007 that still goes on today was caused by the Federal Reserve Bank. But the reality is that it was caused by us, the consumers, and commercial banks. We had no regulations or requirements when we needed to apply for a credit card or when getting a loan. The point is that we spent more than we could have afforded. Banks, on the other hand, put interest higher so that people would not get loans or lines of credit, but they still did. But then inflation went up; the deficit increased due to unpaid loans and credit lines. All these was caused by companies, small businesses, and people who wanted to do more and more without having money in their pockets. So now they blame the Fed for bad regulations and saying that they have too much power over the economy. So this is why we need regulations when applying for a loan or credit; this is the job of the Fed and the Federal Reserve System.

The Fed bailed out several major US companies that contributed a lot to this country. Among these companies are Ford, GMC, and Chrysler. These three big auto companies would have increased the unemployment rate if the Fed and the Government had not intervened. Other bailouts occurred in the banking industry where several banks received federal money to keep operating. These bailouts contributed to keep the employment rate stable and the economy. This is why we need the Federal Reserve Bank to exist: to keep our economy strong, the price of our currency high, to regulate payments and settlements among banks, and to keep creating strong monetary policies, so the problems we encountered will not happened again and make this country financially stable.

In conclusion, everything that we need and that works for us and our businesses, the FED wants it too: better, faster, more efficient, less fraud, and farther reach. The FED also wants to work with financial institutions to let them know what you need from a payment perspective. Would you benefit from faster, maybe even intraday settlement of transactions, or does early notification of what is settling when meet your needs? Do you prefer to push credit payments from your account to the receivers or are you supportive of having trading partners push debits to you? There are no right or wrong answers here, and different circumstances may cause you to employ multiple approaches. The message is simply to think about how the payments system can help you achieve your goals and to work with your payment provider.

“The Fed will work with financial institutions and other players to improve the system in ways that will meet your needs. With more payments being moved electronically, consider the impact to you and your business if you could not clear payments for a week. The Fed stands ready to carry out our broad public service role, but it's through your dialogue with your financial institutions that we at the Fed connect with you as a consumer or a business executive” (Gooding, Marie).

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