Is the Federal Reserve Good For Business?
Federal Reserve System is the main banking unit of the United States. It was enacted under the Federal Reserve act in 1993.Its establishment was influenced by the need to address financial shocks in 1907. It is the central bank of United States whose role includes the supervision of commercial banks, government’s bank, and formulation of monetary policies and lender of last resort.
The main point of discussion is the role played by federal system in the United States economy. According to Daniel Indiviglio, Federal Reserve is the backbone of United States economy and why the economy has withstands external economic shocks. Daniel believes that had there been no supervising financial institution, other commercial banks would apply unorthodox means for selfish gains at the expense of US citizens. Despite his concurrence that the economy would still run in the absence of a Federal reserve, he quickly notes that only an impartial party would execute the duties effectively. These duties include formulation of monetary policies, an oversight role over other commercial banks, and advising the federal government.
The cons position
Robert Larson highlights the negative impact that Federal Reserve has brought in the economy. In his argument, he believes that Federal Reserve is just like any other government commission whose independence exploits the US citizens by formulating discriminatory policies. Larson indicates that Federal Reserve has entertained quantitative easing by allowing a permeability of its independence wall by external parties. He, therefore, believes that the conservative nature of the system is no more and any policy formulation and oversight role played by the system is biased.
Three main areas of disagreements
Policy formulation
Daniel insists that it’s only an independent institution that can formulate and implement monetary policies without bias. However, Robert argues that to maintain impartiality principle, the government could formulate the policies itself and eliminate Federal Reserve
Supervisory role
Daniel believes that Federal Reserve is disciplining body to commercial l banks who could be exploiting the citizens. Robert counters the argument by indicating infringement of the institution’s independence status by Wall Street and other influential persons, thus creating room for biases
Information asymmetry between Federal Reserve bosses and the federal government
This occurs when the federal employees formulate policies that enable self-gains at the expense of the country. For instance, Robert highlights the balancing act by the Federal government where it incurs losses. This is contrary to it objective of stabilizing financial fluctuations and betrays their role of advising the federal government.
My position and Justification
Having considered both arguments from each party, I take the position that an independent body is essential tom play an oversight role and assist the federal government in policy formulation. Therefore, establishment of Federal Reserve by the federal government was the best strategy adopted. Justification of my stance will revolve around the key roles bestowed on the Federal Reserve during its establishment.
Conducting monetary policy formulation and evaluation
For instance, during 2008 global recession, all Federal Reserve bosses form all over the world met to deliberate on how to salvage their economies for the recession shock. They formulated policies on behalf of their governments in a bid to normalize the situation. Fortunately ,they succeeded.Therefore,Federal reserve act as the government’s think tank and at the same time handles financial emergencies on behalf of the government.Therefore,abolishing the Federal reserve will betray the principle of power decentralization.This point concurs with David’s defense of Federal reserve’s.
Supervision and regulation of banking Instructions.
If commercial banks are allowed to operate on their own, they may exploit innocent citizens by charging high interest rates on loans. Federal Reserve may instruct all banking institutions to lower their interest rates at a certain level thus cushioning the economy against excess supply of money which may lead to inflation.
Maintain financial stability and cushion the government against any eventuality.
Federal Reserve acts as the government’s overseer. Furthermore, it is the government’s lender .Therefore; it may offer money to the government or authorize printing of money to the economy. The role cannot be assumed by a private body and it’s, therefore, inevitable to eliminate Federal or central bank. In addition, it’s an act of diversification of risk by the government to delegate responsibility to the Federal Reserve.
Provide financial services to depository institution and the US government
Federal Reserve may lend money to the government because it’s the government’s deposit. This strategy is essential as the government may earn interest from its deposits gained through on-lending to financial institutions. Another essential role played by the Federal Reserve is off erring advisory services to financial institutions thus easing the government’s burden to attend to all citizens. Therefore, Federal government is an inevitable government body that the government will suffer if it is abolished.
References
ORourke, J. S. (1993). Book Reviews : Newton, Lisa H. & Ford, Maureen M. (1990). Taking Sides: Clashing Views on Controversial Issues in Business Ethics and Society. Guilford, CT: Dushkin Publishing Group, Inc. 348 pages. Business Communication Quarterly.
