Demystifying the Fed
On November 25, 2013, Dr. Wang Jian, senior research economist and advisor at Federal Reserve Bank of Dallas, demystified the Fed with 100 honored guests in the 18th installment of Hongru Forum.
With the popularity of conspiracy theory books such as Currency War, the US Federal Reserve is regarded as the puppet of private banks by many Chinese people and even some policy makers. So, Dr. Wang introduced the history, operations and functions of the Federal Reserve in detail at the first beginning. He concluded that the Fed is an unusual mixture of public and private elements, while its seven governors are all appointed by the US president, private banks do hold shares in its 12 regional reserve banks.
Dr. Wang believed that the birth of the Federal Reserve has ended the excessive turbulence of the financial market that is caused by the gold standard, and this is the advantage that the currency system is superior to the gold standard. More importantly, central banks can play the role of the lender of last resort under Paper Money Standard System, and thereby defend the stability of banks. Since the establishment of the Federal Reserve, except the time of the early stage Great Depression, there are nearly no bank runs in U.S. during nearly 100 years.
Besides, Dr. Wang also discussed two important financial topics of the subprime crisis and quantitative easing (QE), and has further elaborated how the Federal Reserve formulates monetary policies. He pointed out the outburst of the subprime crisis tests the responsibilities of the Federal Reserve as the lender of last resort. The Federal Reserve has rescued the financial institutions such as AIG and Freddie Mac etc. that have systematic risks, has avoided the further spreading of the risks. At the same time, he stated that in the time when the economy gone upward, even Greenspan warned that there were great risks of investment banks, but the Fed as the central bank has no power to supervise these institutions. The congressional legislation cannot catch up with the changes of the financial structure, and these responsibilities cannot all be attributed to the Fed that also has to learn by doing. On the other hand, the policy target of QE is the economic recovery or employment. Currently the officials of the Fed hold different opinions on whether the economy has recovered, and this led to the argument on whether QE should be quit. Ultimately, Wang stated that it’s the Fed’s apparent responsibility to promote economic recovery.
“Hongru Forum” is a public seminar jointly launched by Liu Hongru Financial Education Foundation and SIFL Institute, and is held regularly once in two weeks. The seminar pays attention to various issues in China’s finance and macro-economy, and devotes itself to building a platform for cross boundary exchanges among excellent scholars, government and market institutions.
Since August 2013, “Hongru Forum” has gained the exclusive support of Chang’An International Trust Co., Ltd.
