Wednesday, September 12, 2007

Yet another reason to read the Financial Times

Yes, the Financial Times is the best newspaper on the planet. The fact that this article is written almost as an aside says a lot:

Lex: Federal Reserve System

The Federal Reserve System is split into 12 regional banks.... A devolved model certainly guarantees debate: on Monday the presidents of the Dallas and San Francisco Feds gave divergent hints about the likely path of US interest rates. But is it really necessary?

The Fed’s structure is a historical quirk. After two failed attempts to establish US central banks, in 1913 a regional model was enacted, partly to mitigate political concerns about concentration of power. The 12 cities selected look pretty arbitrary today: Minneapolis has under 2 per cent of the system’s assets, while San Francisco, responsible for the whole of the US west of Dallas, has 11 per cent, and New York a third....

Since 1942 New York has had its own seat on the Federal Open Market Committee, which decides interest rates, but the other regional Feds share four of 12 FOMC seats on a rotating basis. Only New York conducts market operations while management of backoffice systems is being consolidated....

If the devolved model of the ... Fed did not exist, no one would invent [it]. But the political and constitutional dimensions of central banks make rapid reform unlikely. Regional Feds are at least quietly streamlining themselves by focusing on specific operating areas (Atlanta is big on money laundering) and intellectual fields (St Louis is known for monetarism, while San Francisco is home to gurus on Asia).

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