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Centralverse Q&A, Round I

The first episode in a new series I’m calling, “Centralverse Q&A”. If you have questions you’d like answered on the podcast send them in. As always, I can be reached for comments, feedback, or questions on twitter or via my website www.thebanksterpodcast.com.

Introduction

I am Alexander Bagehot and you’re listening to The Bankster Podcast, the only podcast dedicated to the fascinating and ever more consequential world of central banking.

Today’s episode is Part I of a new series that I expect to drop into the feed occasionally called, “Centralverse Q&A”. I’ll take questions from multiple spots on the complexity spectrum and answer them here on the podcast. For every question I’ll start by briefly sharing any background information that might be required to understand the question, then I’ll give a short answer, and then a longer explanation. I hope this will be a fun way to learn about some of the more nuanced roles and responsibilities of the Federal Reserve and other central banks the world over.

On this first round I’m going to answer two questions I’ve heard over the last few weeks. These were really fun to research because I actually did not know the answer to either question when I was initially asked. There’s still plenty for me to learn. And I want to share that with all of you! So on to the questions.

Question #1

Does or could the Federal Reserve use fines they levy on banks to cover operating costs?

Background #1

The Fed collects lots of money every year. Most of the money comes from interest that the Fed earns on the debt that they own. In this way the Fed is kind of like a traditional bank. The debt that your bank owns includes your home mortgage. So you pay your bank every month. Similarly the Fed owns lots of debt and therefore receives lots of payments every month. The two main categories of debt that they own are (1) Government debt, so uncle Sam is paying the Federal Reserve interest every month and (2) Mortgage Backed Securities, which is basically a bundle of mortgages.

Another, much smaller way, in which the Fed collects money is through charging for services. Some of these services include processing checks and clearing large dollar money transfers. The banks that use these services have to pay to use them.

Every week the Federal Reserve takes all of the money that they have collected, they subtract how much it cost to run the Fed, and then they give the rest to the US Treasury. This transfer of money from the Fed to the Treasury is called a remittance. Last year the Fed remitted $92 Billion.

Now, there’s one other way the Fed collects money that I didn’t describe but was mentioned in the question, fines. The Fed levies hundreds of millions of dollars of fines on banking institutions every year. Does that money go through the same process? Could it be argued that the Federal Reserve uses the money they collect on fines to cover their operating expenses?

Short Answer #1

No, the money goes straight to the Treasury.

Long Answer #1

The Federal Reserve Bank of Richmond serves as the accounting agent of the US Treasury, which basically means the checking account of the US Treasury is on the Richmond Fed’s accounting books. So the fine is issued by the Board of Governors, the bank pays the US Treasury which is deposited at the Federal Reserve Bank of Richmond. The fines are listed on the books as “other liabilities” and not as “remittances”. So that means the fines are not and could not be used to cover operating expenses of running the Federal Reserve.

Question #2

What is the process for changing the Chair of the Federal Reserve?

Background

Janet Yellen, the current chairwoman of the Federal Reserve, finishes her term this coming February. As is the case with all high profile political appointments, the decision of whether President Trump will renominate her or choose someone else has garnered a lot of public attention in the last few months and the discussions and rumors will only heat up as the end of the year approaches.

Short Answer

Every 4 years the President of the United States nominates and the Senate confirms one of the seven Governors of the Federal Reserve to serve as Chair.

Long Answer

The four year term of the Federal Reserve Chair is set on the even years when there is not a US presidential election. So elections in 2016, new term for the Chair in 2018, presidential elections in 2020, new term for the Chair in 2022, and so on. The Federal Reserve System was designed this way so that a new president couldn’t come in and immediately change the leader of the central bank. It’s one more example of the structural defenses that are built into the Fed to keep it independent from short term political actions.

Historically, the Fed Chair has been reappointed by a new president even when the president is of a different political party. Ben Bernanke was appointed first by George W Bush and then reappointed by Barack Obama. Alan Greenspan was appointed by Ronald Reagan and then reappointed by both Bill Clinton and George W Bush. Paul Volcker was appointed by Jimmy Carter and reappointed by Ronald Reagan. So if President Trump does not reappoint Janet Yellen it will be a first in a very long time.

But the story wouldn’t be over if President Trump decided to remove Janet Yellen as Chair. See, the President only has the power to remove her from her position as Chair. He cannot remove her completely from the Board of Governors, so even if she was removed, she could still stay on as a Governor. Only one time has a Federal Reserve Chair stayed on after being removed as Chair and that was Marriner Eccles back in the late 1940’s. If you remember from Episode 7, Eccles stayed on as a governor, to ensure that the Federal Reserve completed its push for true independence from the Executive Branch of the Federal Government.

Currently there are still two Governor positions on the Board of Governors that sit vacant. So even if President Trump removed Janet Yellen and she decided to stay on as a Governor, he could still appoint a new person of his choosing to one of the two vacant positions, and then make that person the Chair. This new person would only have to go through one appointment and nomination process, both the Governor and Chair position at the same time.

It will be very interesting to watch what happens with the Chair position over the next six months. But in summary, the President will nominate someone to be the Chair (either Janet Yellen, one of the other Governors, or a new person), the Senate will have to confirm the person, and then they will take up the position as Chair of the Federal Reserve for the next four years.     

And that concludes the first round of Centralverse Q&A. If you have questions you’d like answered on the podcast send them in. As always, I can be reached for comments, feedback, or questions on twitter or via my website www.thebanksterpodcast.com.

Conclusion

Today’s episode was written, edited, and produced by me, Alexander Bagehot. Reach out with your feedback, comments, and questions on twitter or via my website www.thebanksterpodcast.com. Leave a rating and share the podcast with your coworkers and classmates. Thanks to all of you for listening, and I’ll see you next time on The Bankster Podcast!

 

The 8th Governor

The 8th Governor

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