Comparison Between the Federal Reserve System and the European Central Bank (Research Paper Sample)

Central Banks (Assignment 2)
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Introduction
The Central Banks around the world play an essential role in maintaining stability and sanity within the global financial markets given that they are in charge of the monetary policy. The actions of Central Banks affect the interest rate levels, the money supply, and the level of credit available in the nation. These three elements of which the Central Banks have significant control over have a direct impact on the country’s financial markets and the overall economy. It is thus important to understand the structure of these institutions, how they work, who controls them, who determines their actions, and their input in the nation. In this paper, the institutional structures of both the Federal Reserve System and the European Central Bank will be assessed with a view of determining how they are organized. In addition, the paper seeks to discuss particular aspects that are evident in the world financial markets such as the creation of asset bubbles. The US credit crisis will be critically analyzed with the objective of determining the effectiveness of the Federal Reserve System’s measures. In addition, the government intervention measures in the economy will be discussed by considering the differences between the Austrian and Keynesian economists. Lastly, the paper seeks to source, creation, impact, and the principal beneficiaries of hyperinflation within the financial markets and the general economy.
Comparison between the Federal Reserve System and the European Central Bank
The Federal Reserve System
The Federal Reserve is answerable for managing the monetary policy of the United States. The institution is headed by an autonomous Board of Governors that’s comprised of at least seven individuals that are autonomous of political power (Board of Governors of the Federal Reserve System (U.S.) 2005). The nominations of the affiliates to the Board of Governors are normally conducted by the President which must be approved by the US Senate before appointments can be made (Board of Governors of the Federal Reserve System, 2005). Each board affiliate of the Federal Reserve is appointed to serve for a 14-year term that’s non-renewable. The US Federal Reserve System is comprised of a number of banks that are headed by their respective presidents.
The core responsibility of the FED’s Board affiliates is to formulate the country’s monetary policy (Federal Reserve Board 2003). The Federal Open Market Committee is tasked with the responsibility for making of decisions that influence the price and accessibility of loans and money. On top of developing monetary policy, the Board is answerable for setting the reserve rations and the discount rate policy that the banks must observe the execution of their functions. The FED maintains significant oversight and guiding control over US banks that are its affiliates. In addition to these duties, it is also tasked with maintaining the credit policy of the monetary system by stipulating the minimum credit requirements in the economy (Federal Reserve Board 2003). The responsibility for ensuring that there is a continued development and a smooth functioning of the country’s vast and robust payment system lies with the Board. The independence of the Board provides that the bank is autonomous in its operations thus improving its oversight and supervisory authority over other banks.
The Federal System is also in control of the running and change of the regulations prevailing the credit policy for the consumers (Federal Reserve Board 2003). The principal federal laws guiding the credit system include the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act. The Board of the Federal Reserve regularly holds meetings that are conducted subject to the provisions of the Sunshine Act. Additionally, the board has a significant number of contacts within government such as the banking industry stakeholders, affiliates of the Congress, and government agencies. The Federal System usually works with the various Treasury officials and advisors from the Council of Economic Advisers who are crucial when evaluating the nation’s economic climate (Federal Reserve Board 2003).
The structure of Federal Reserve System is also comprised of the Board of Directors who are answerable for supervision of the Reserve Bank (Federal Reserve Board 2003). In addition, they are answerable for making recommendations on the US monetary policy while also approving the bank’s annual budget. They also set the discount rate for the bank within a span of two weeks that is crucial in influencing the cost and availability of credit and money in the economy. The Board of Governors of the Reserve Bank are required to report to the Congress twice every year on the course of the nation’s monetary policy and the state of the economy (Federal Reserve Board 2003). An audit of the Federal Reserve’s accounts is conducted twice a year before the Chairman of the Board can present the bank’s annual report to the US Congress.
The ECB
The ECB plays an integral role in the EU given that it has facilitated the total monetary and economic union among affiliate states. According to Sailus (2015), the European Economic Community (EEC) implemented a one-currency system in 1973 that provided way for the development of a monetary union and collaboration between the different affiliate states. The Euro was introduced as a sole unit of money in the Eurozone, and it has significantly improved the trading within the Euro area. The bank is autonomous of the other major EU institutions with the particular regard to the management of the Euro area’s currency affairs. Mishkin (2015) draws significant differences between the European Central Bank and America’s Federal Reserve System. According to Mishkin (2015), the formal structure of the US Federal Reserve comprises of five bodies.
In the specific regard to the management of currency, the European Central Bank is more autonomous and efficient than the Federal Reserve. Although the Federal Reserve has a formally decentralized structure, it is under significant control by the Chairman of the Board (Mishkin, 2015). Its independence may be compromised given that there exist significant political pressure from the Congress. The ECB enjoys a lot of autonomy given the high level of objectivity that it has from the affiliate states. The organizational arrangement of the bank is comprised of three principal organs that include the General Council, the Governing Council, and the Executive Board. The Board is the most powerful organ of the ECB given that it is tasked with the day to day running of the business of the bank (European Central Bank 2015).
The other two major bodies that comprise the bank’s organizational model include the Governing Council and the General Council. The bank’s Governing Council is answerable for the direction of the bank’s financial policy. It ensures that there’s an efficient and stable monetary policy within all the affiliate states of the EU. In addition, the Governing Council is answerable for controlling the interest rate levels between the European Central Bank and the Eurozone commercial banks (European Central Bank 2015). The other integral body in the bank’s organizational structure is the General Council that is answerable for ensuring that other European countries are prepared to adopt the Euro currency. The issue of independence is addressed in Article 30 of the Treaty on the Functioning of the European Union. The decree states that neither the ECB, the national CB, nor an affiliate of the three bodies shall take or seek instructions from the union’s institutions or any affiliate state (European Central Bank 2015). Thus, this ensures that the officials of the ECB are highly sovereign when carrying out their duties and tasks and when exercising their powers.
Assets bubbles and the US credit crisis
Asset bubbles are formed when the prices of particular items rise quickly over a short span of time in which the price increases are not supported by any corresponding increase in the underlying demand. According to Amadeo (2015), asset crises get created in circumstances in which the asset prices of particular assets become over-inflated price. In addition, asset bubbles are created in circumstances whereby the investors bid in vast amounts resulting in bidding up the asset prices exceeding the real sustainable value of the assets. Atop all this, the asset suds are created when a high number of investors are involved in the purchase of a given asset classes. These are real estate, stock market, and, or commodities asset classes. Oyedele (2014) argues that there is a looming mother of all bubbles that’s set to take place in 2016. The situation has been aggravated by the rally in stocks within the US markets and the surge in the high-yield debt issuance in the face of low inflation and low growth rates.
The credit crisis within the United States emerged in late 2007 from the US mortgage market that mutated to the global financial crisis in 2008. The crisis was caused by the borrowing and lending decisions of the various players within the financial services sector that was imprudent. In addition, the absence of proper and adequate regulatory frameworks makes it possible for lending institutions and borrowers to engage in reckless lending and borrowing actions. A number of stocks within the US financial services industry recorded a significant decline in their nominal values. The credit crisis was significantly influenced by the developments in the US ...