#TBT "The powers that be"
Today's Throwback comes with a pop quiz:
If Nancy could be anything she wanted to be, what would she choose?
To see just how well you know Nancy, read her Mississippi Business Journal column from July of '96. (Of course, this was before Michael Phelps earned his 23rd Olympic medal. She may have changed her answer since the August games.)
Several years ago, someone asked me this question, "If you could be anything you wanted to be, what would you choose?"
I could have said a famous movie star. I didn't. I could have said a Pulitzer prize-winning author. I didn't. I could have said a world-renowned surgeon. I didn't. I could have even said the President of the United States. I didn't. Instead, I quickly replied, "Chairman (woman) of the Federal Reserve Bank."
No, I haven't lost my marbles, and no, I'm not so boring that I would pass up the excitement offered by these other positions. It's just that I know being Chairman of the Fed is THE most powerful position in this country, perhaps even the world. And it's not even an elected one!
The money supply in this country is controlled by the Federal Reserve System, which is made up of 12 regional banks. The one nearest us is in New Orleans. All 12 of these are considered our central banks. They are called "bankers' banks" because they do the same thing for banks as your local bank does for you...hold deposits and make loans, among other things.
These banks are actually owned by the member banks of each district, but they are controlled by a government body. This body is the Board of Governors, affectionately known as the Fed. The President appoints these Board members, and yes, Gov. Fordice, even they must be approved by the Senate. There are seven members of the Board, and each serves a term of 14 years. You'll note that these terms outlast the term of any President. The terms are actually staggered so that every two years, one person is replaced. This means that one single President will appoint, at most, four members to this powerful body. The purpose of this design is to keep politics out of monetary policy. After all, what President wouldn't like to pull strings to lower interest rates, fueling the economy and pushing the markets higher, when time for reelection rolled around? But such an arrangement could be dangerous for the economy.
While most of us would be hard-pressed to name all seven members of this Board, most could probably name its chairman - Alan Greenspan. Mr. Greenspan's dour face is often seen on the front pages of the paper or on the evening news. Occasionally, he is called before a Congressional committee to answer questions about the economy. Notice he does not have to answer TO them.
I watched one of these hearings in amusement. You see, these Senators who normally expect everyone to bow and scrape to them were, themselves, bowing and scraping to Mr. Greenspan. You've never seen so much puckering in your life!
But what does the Fed do that makes them so powerful? They make decisions about the supply of money. And remember that the price of money is interest. A more plentiful supply of money is like your local department store buying too many winter coats. They end up having a sale to get rid of the excess. When money is in great supply, interest rates go down to entice consumers and businesses to borrow. It's just the old supply and demand principle. Less money in circulation means higher prices, or higher interest rates.
The three ways the Fed has of influencing the money supply are 1) reserve ratios, 2) discount rates, and 3) open market operations.
Reserves are the deposits of commercial banks which are being held by the Federal Reserve Bank. The Fed requires a certain percentage of total deposit liabilities be kept on deposit by each bank. This percentage is called the reserve ratio. If a bank has $100,000 in deposits from its customers, and the reserve ratio is 20%, then the bank must keep $20,000 on deposit with the Federal Reserve Bank. Anything over that amount (excess reserves) can be used to make loans. Remember that bankers make money by lending money.
If the Board of Governors decides to change this reserve ratio, it affects the money supply. If, instead of 20%, a bank must keep 25% on deposit, that means the required reserve is now $25,000. The bank has $5,000 less to lend. That means it is harder for consumers and businesses to get the loans we need to buy cars, houses and industrial equipment. The money supply is decreased or tightened. Decreasing the reserve ratio has the opposite effect. This method is not used very often. The Board of Governors also determines the interest rate that will be applied to loans made to individual banks. This is the discount rate. Each month the Board meets, and people across the globe watch for announced changes in this rate. Financial markets live and die by these changes. Increases in this rate mean increases for the average consumer, and decreases mean lower interest rates. Everybody knows that when interest rates move lower, we start buying cars and houses and businesses start expanding. When those rates start heading north, everything slows down. The power comes from the effect these changes have on our financial markets. And because money makes the world go round, their decisions influence everything from General Motors' decision to build a new factory to how much I spend at Christmas. They can even determine how we'll vote in the next election. Now, that's power! So, what do YOU want to be when you grow up?
--Nancy Lottridge Anderson, Mississippi Business Journal, July 15, 1996