Kenneth R. Szulczyk
twelve Federal Reserve banks have over the Board of Governors. Consequently, Board of
Governors centralizes the power within the Federal Reserve and controls it.
All central banks of the European Union buy stock into the European Central Bank, even
countries that are not members of the Eurozone. Thus, the EU central banks own the European
Central Bank. Similarly, the national commercial banks buy the Federal Reserves’ stock in its
district within the United States. Amount of stock, a central bank buys, depends on a country’s
population and GDP. Germany owned 18.9% of the ECB’s stock in 2011 while France owned
14.2%, and Great Britain had 14.5%. The ECB returns 80% of its profits to the stockholders,
which are the central banks of member countries.
The European Central Bank is the most independent central bank in the world. No EU
country or EU institution can hold it accountable. Even the European Parliament, the highest
representative body of the EU, cannot audit or dictate policy to the ECB. Moreover, the ECB
does not receive funding from any EU body or government, and the terms are staggered for the
Executive Board. Thus, the European Council cannot manipulate the ECB by appointing the
whole Executive Board at once. Consequently, the ECB concentrates on price stability, which
they define as a 2% or less inflation rate per year. Other countries, such as the United States can
pressure the central bank to pursue several goals, such as lowering the unemployment rate or
manipulating interest and currency exchange rates.
The Eurozone created three problems among its EU members. First, the countries
surrendered control of their monetary policy. If a country experiences financial problems, it
cannot use its central bank to help finance the government’s deficit. For instance, a central bank
could devalue its currency to stimulate economic growth because a devalued currency boosts
exports and reduces imports, creating jobs in the export industries. Second, prices soared in
Southern Europe while wages fell behind, impoverishing many people. Finally, the ECB cannot
legally buy bonds from EU governments. However, the Europeans were worried about the
Greek Debt Crisis, and it bought Greek government bonds to keep the Greek government
operating. We discuss the Greek debt crisis in the next section.
Is the Federal Reserve Independent of the U.S. Government?
Two viewpoints describe whether the Fed serves the public interest or acts in its own self-
interest. Public interest view states the Fed serves the public by implementing monetary policy
that causes stable prices, low unemployment, and strong economic growth. Many economists
argue the Fed does not serve the public interest because it does not emphasize price stability and
economic growth. Furthermore, many experts criticized the Fed’s role in the 2008 Financial
Crisis. Unfortunately, the Fed kept interest rates low artificially. Low interest rates encourage
people and speculators to buy houses, inflating both the housing bubble and housing prices.
Principal-agent view is government bureaucracies do not serve the purpose the political
leaders created them for. Bureaucrats become concerned about maximizing their power,
influence, and prestige. For example, a new computer corporation is founded, and it creates new
computers for a low price. If consumers buy this computer, then the corporation earns profits.
However, if the corporation builds computers that nobody wants, subsequently, the corporation
will bankrupt. Profits ensure businesses will produce goods and services that consumers want.