 We've talked about what the Fed does. Let's talk about how it's run and specifically about its role in the financial crisis. The Fed is a government entity, but it's not directly managed like the other federal agencies. It's a public-private partnership. The board, which manages the entire Fed, is appointed by the president and confirmed by the Senate, like other agencies. But they serve under multiple presidents and they can't be removed by the president. Unlike other agencies. The Fed also has 12 regional reserve banks in major cities around the country. They are composed of all the banks which are members of the Fed, which is about 38% of the banks in the country. The regional boards have nine members, with three being bankers elected by the member banks, three being appointed by the national Fed board, and three being non-bankers elected by the member banks. The definition of a bank is a specific regulatory thing that means a lot, but is tiring to explain. You get regulated differently depending on what kind of financial institution you are, so armies of lawyers get involved trying to make sure that they get the best treatment under the existing system. All national banks are required to be members of the Fed, while membership is optional for state banks. The Fed doesn't get any money through the federal budget. It charges fees for every transaction it performs for the federal government and for Fed member banks, like transferring money. It's required to return any extra income back to the Treasury, which has been tens of millions of dollars in some years. Because there's no way to fire Fed officials and it doesn't need congressional or presidential approval for its decisions, the Fed is pretty independent. The only real way to control it is to change its authorizing laws. This is because when the Fed was created in 1913, it was set up so that it wouldn't be too responsive to public opinion. Congress wanted the Fed to make its decisions independently. Congress oversees some of what the Fed does, but it can't audit the Fed's monetary policy decisions or its foreign transactions. It can only ask questions about those in congressional hearings. During the financial crisis, the Fed had a huge role in the government response and then afterwards, it was given several new powers by the Dodd-Frank financial system reform bill. First, there are the loans. Until recently, it wasn't clear how much money the Fed had loaned out during the financial crisis. Dodd-Frank required an audit of all the Fed's emergency loans during the crisis. The audit revealed that a total of $1 trillion was on loan at any one time, with another $600 million being spent through government contracts for help managing emergency activities. The audit also stated that the Fed's rules about avoiding conflicts of interest in how these big contracts were given out were not strong enough to keep it from appearing as if some firms got unfair advantages. Further, it said that the Fed didn't have enough rules in place so that its employees would know which banks and financial institutions were too risky to give loans to, and that the procedures in place were not consistent and gave too much discretion to Fed staff. The loans fell under the Fed's role as a lender of the last resort, because no one in the private sector could or would loan money to keep the economy going. It is generally believed that without these loans, the economy would have frozen up, with no one being able to borrow money or even to get their money out of the banks. The money supply might even have shrank. The other big thing that the Fed did during the financial crisis was called quantitative easing, which is another newer way for the Fed to create money. The Fed doesn't print money, but it does hold the federal government's bank accounts, so it can create money by adding to those account balances electronically. During the financial crisis, many banks and other financial institutions saw their assets, especially collections of mortgages, lose most of their value. The Fed was granted the authority to use created money to buy some of these assets, as well as government bonds. The idea was to keep the banks from losing so much money that they collapsed. The Fed kept doing it in the hopes that it would boost the economy. The Fed had already used monetary policy, as discussed earlier, to lower interest rates and boost the economy. The idea is that low interest rates means lower rates of return on savings and investments, so people are more likely to spend their money and increase growth. The problem was that they had lowered interest rates and people still weren't spending money, nor were banks loaning money. Quantitative easing was the next thing they could try. So far, some $4 trillion had been spent in this way or will be spent by the end of round 4, which is what we're in now. Economists generally agree that the first round of quantitative easing helped keep the recession from becoming a depression, but disagree about how valuable everything was after that. Counting everything the Fed gave out, that's almost $6 trillion in spending, though many of the loans have already been paid back. The Dodd-Frank bill, passed in 2010, did a lot of different things, including several major changes to the Fed's authority, designed to help prevent a future financial system collapse. First, the Fed now has the power to regulate savings and loans, also called thrifts or SNLs. These are special kinds of banks which only take in deposits and create or buy mortgages. SNLs aren't regular savings banks, so they're not insured by the FDIC. You may have heard of them before because they needed their own giant bailout back in the 80s. Second, the law creates a special board which will identify any banks or other financial institutions that are systematically significant to the financial markets, which means too big to fail. When an institution is designated too big to fail, it will be regulated by the Fed. Third, the president of each regional Federal Reserve Bank is now elected in a different way than before. It used to be that all the members of the board voted for the president, but now the board members from banks can't vote. Fourth, the Fed now has the authority to make rules about whether or not banks and investment firms can make investments with their own money at the same time that they invest their clients' money. There have been problems with investment firms driving up the value of their own investments by betting against their clients' investments, but still taking the fees for managing the investments like an impartial advisor. This is pretty basic information about what the Fed is and what it does. There's a lot of argument about how the Fed responded to the financial crisis, what its role should be in the economy, and how it should be managed. Now you can find those arguments and decide for yourself based on knowing a little bit more about the Fed. And there you have it.