By Jonny Lupsha, News Editor
The US Federal Reserve restricted stock trading by senior officials last week. The restrictions were imposed just weeks after the resignation of two regional bank presidents amid insider trading charges. The Fed has a rich and eventful history.
The U.S. Federal Reserve on Thursday imposed new rules and restrictions on its senior officials regarding trading in individual stocks and other investment stocks. The action is the result of a recent controversy surrounding two of the Federal Reserve’s 12 regional bank chairmen, who resigned in light of the publication of their active stock transactions in 2020. The reports have sparked a series of accusations ethical breaches that led to Senator Elizabeth Warren (D-MA) calling for an investigation into the Fed’s insider trading.
However, although it’s been around for over two centuries, many still don’t know what the Fed is doing. In his video series International economic institutions: globalism versus nationalism, Dr Ramon De Gennaro, CBA professor of banking and finance at the University of Tennessee, Knoxville, explained how his first incarnation rose and fell.
An institution with mixed success
“As long as there have been banks, there have been problems with banks – the Federal Reserve System, or the Fed, was founded to solve, or at least reduce, the frequency and severity of these problems. “said Dr DeGennaro. . “The Fed is a big, big institution; it includes the Board of Governors, the Federal Open Market Committee, 12 Federal Reserve Banks, more than 20 branches and several advisory committees.
“In short, the Fed is the central bank of the United States, and being the central bank of a big, big country – like the United States – is a big, big job.”
According to Dr DeGennaro, the Fed’s job is to ensure stable economic growth, low inflation and healthy jobs, which has had mixed success. In fact, the modern Fed is the third attempt by the United States to create a central bank, of which the first two have failed. So what does it do?
“The idea is that the Fed would lend freely, at a penalty interest rate and against good collateral from healthy banks with temporary liquidity problems,” said Dr DeGennaro. “To make sure the Fed gets the money it lends, it gets collateral to repay the loans in case the borrower can’t pay back in cash. Healthy banks have such guarantees.
Compared to most countries in Europe, the United States has recently turned to the central bank, as Americans still distrusted centralized power after the War of Independence, believing that centralization led to corruption. However, the centralized bank had a convincing supporter.
The room where it happened
“After the War of Independence, Alexander Hamilton became the go-to person for supporters of a central bank,” said Dr DeGennaro. Hamilton argued that the new nation needed a national bank to lubricate the flow of credit – no economic law prevents 13 states from issuing 13 different currencies, but it makes transactions between states a little more difficult. .
“Consider converting Canadian dollars to US dollars without the convenience of high-speed computers. “
Obviously, a single national currency would make things much easier. The Fed could issue a single paper currency. Of course, many government officials opposed the idea, including Thomas Jefferson. Jefferson feared that a central bank would concentrate too much power in a few hands, essentially turning the United States into an oligarchy. However, Hamilton came out on top.
“In 1791, President George Washington signed a bill granting a 20-year charter to the First Bank of the United States, located at Carpenters’ Hall, in what is now historic Philadelphia,” said said Dr DeGennaro. “The First Bank served as the tax agent for the US government. He received income, held deposits and made payments; it also offered services to individuals.
Unfortunately, international interests and national conflicts crippled and ultimately killed the first iteration of the central bank. After a lukewarm restart of the Fed, Andrew Jackson successfully led a political campaign to finance the second bank in 1833. This allowed it to stagnate and die in 1836. The third and current central bank would not be founded until 1913. under President Woodrow Wilson. .
Edited by Angela Shoemaker, The Great Courses Daily