It's becoming more widely understood in America and around the world that the largest central bank in the world, the Federal Reserve (Fed), is not government owned. In fact it's privately owned by the largest private banks, not just in the US, but around the world. This creates a very unusual and uneasy situation. To understand the implications, we first need to understand how the Fed is structured.
In simple terms, the Fed is not a single central bank, but a collection of 12 banks across the US, located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St Louis, Minneapolis, Kansas City, Dallas and San Francisco. The shareholders of each bank are, by law, all national banks and some state chartered banks. They’re called "member banks," and their shareholders are private individuals and institutions. The shares held by the member banks don't operate like normal shares. They don't rise and fall in value like normal shares; they are fixed at $100 per share. They can't be traded or used as collateral, but they do receive a guaranteed 6% annual return, paid by US taxpayers.
Now, when the Fed wants to stimulate the economy by increasing liquidity, all it does is tell the government to give it more money. The Fed pays a few cents on the dollar for it (it's hard to find out exactly how much), and it then buys government bonds, which puts the newly created money into circulation. The bonds are government backed and guaranteed; effectively they’re a government IOU; in effect the Fed, a private entity, creates money out of thin air.
The Fed is paid interest on the reserves it holds, again by the taxpayer. Due to fractional lending, the Fed is able to lend around 7 times its reserves, and of course receive interest on those funds. Therefore, US taxpayers are paying the Fed interest on reserves for the privilege of allowing it to generate interest on ten times its reserves — and the reserves are created out of thin air.
Remember, the Fed is a privately owned entity, so the question now being asked is: what value does the Fed really add? It was supposed to add stability to the financial system, but the global financial crisis tells us that this is not working. Perhaps of even more concern is that the independence of the Fed is also being questioned. Is there a conflict of interest between the shareholders of the Fed (the large private banks and families) and US citizens? These questions surely need to be debated in an effort to create a more fair and stable financial system.
In my view, the single biggest issue with the current Federal Reserve system, is that its activities are beyond scrutiny. There is no public disclosure of its discussions and decisions, and although the Governance Council of the Fed is government selected, the influence of its banking shareholders cannot be underestimated.
The secrecy of the Fed is surely a major risk to world stability.