Okay so what would happen if Alan Greenspan and the rest of the guys on the Federal Reserve Board for reasons unknown decided to crash the US economy? Lets say they decide the prime rate should be 50% or 0% or something that would be totally out of hand.
Who would stop them and how? That whole ‘answerable to no one’ thing got me thinking. Where is the check and balance?
I will not criticize what Cecil wrote, but the inference that some might draw from that brief answer is not what was implied, I’m sure. The Federal Reserve Act clearly states that the who are appointed to the Board of Governors “shall serve for a term of ten years unless sooner removed for cause by the President.”
I think that by “answerable to no one” is intended to reflect the fact that they are in for a set term that is longer than the elected terms of the President, Senate, and House. IIRC, the idea is to have them be in office long enough to insulate them from political pressures and allow them to act dispassionately, for lack of a better word.
I think it is something like how federal judges are in office for a long time without having to vie for the support of the hoi polloi every couple of years. (Federal judges are in for life, whereas the Fed goveners have a set term, but you get the idea.)
Well it means that and one other important thing. If you pick any ordinary government department, Congress and the President can wield control over them by using their budget, because they won’t get any money for a particular year unless Congress allocates it. This is not true for the Federal Reserve.
Whenever the Federal Reserve conducts on open market operation, they acquire some amount of U.S. Treasury bills, notes, and/or bonds. They keep these, and the interest from them pays for salaries and other expenses. The Federal Reserve gets no money form taxes, so they are completely financially independent of any of the branches of the government.
Fly: if they said the prime rate was to be 50% everyone with an ARM would simultaneously declare bankruptcy, the housing market would dissolve and you would have very little economic growth as no one could afford a loan.
If the rate was 0%, theorecitally it would encourage loans to be taken out, but didn’t work so well in Japan, so who knows?
The Fed sets the discount rate, the rate at which banks borrow from the Fed to cover short-term short falls in their required reserves. If this rate is pushed through the roof, then banks will increase their reserves to ensure that they don’t get caught short, as it will be prohibitively expensive to pay high rates.