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The Federal Reserve is a quasi-governmental institution with corruption written into its charter.
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Is the Fed a private corporation?
If it is, it's kind of a queer one.
The Federal Reserve Banks are "private" in the sense that they issue shares, and these shares are held by private banks. But these banks are not allowed to sell the shares or order the Reserve Banks to do anything unusual--their actions are defined by public law.
The shady part is that the shareholding banks are allowed to elect six of the nine members of each Reserve Bank's board of directors--a majority. These directors then appoint, by majority vote, the bank presidents. And what do these presidents do? Well, read on...
Structure of the Fed
The Federal Reserve is made up of nine banks, which don't do very much at all besides busywork, and a central bank with a government-appointed Board of Directors and something called the Federal Open Market Committee.
The Federal Open Markets Committee is the most important part of the Fed. They set that "interest rate" that you hear about so often--basically, they can give banks windfalls of money whenever they so desire. Seven of its members are appointed by Congress, and five members are Reserve Bank presidents. As you've read above, these presidents are appointed by the board of directory controlled by the banks. They are therefore bank representatives. No other government institution is partially run by the industry it's meant to regulate.
Is it bad?
I spoke with Barney Frank, the chairman of the House Financial Services Committee, about his opinion of the Fed. He indicated there was a definite need for reform. Specifically, there is no need for 5/12 of the FOMC to be run by the industry.
It's true that bank representatives will be clued in to the problems of the industry. But we know from the 19th century that banks can't regulate themselves. And while the Fed should be free of partisanship, the way it's set up is disturbing.
The FOMC usually operates in utter secrecy. Congress is not allowed to observe their proceedings and they do not issue statements explaining why they did what they did to the interest rates. In rare cases, parts of the FOMC will issue dissents. Barney Frank investigated and found that most of the time, those dissents come from the bankers who wanted higher interest rates, i.e., more money for the banks. That's all Congress knows. Barney doesn't know how often the banks prevent interest rates from being lowered; all of that is secret.
Is it as bad as it could be?
I also asked Barney about the infamous "infinite guarantee" to Fannie Mae & Freddie Mac. I didn't ask whether it was good policy; he probably didn't want to talk about all that. I asked, rather, why the Fed had the power to extend that guarantee, and whether they could do it without congressional permission. He said that the power to make these guarantees was part of a set of "emergency powers" granted in the New Deal, and Bernanke consulted him before he made the decision, with the intent of swiftly guaranteeing Fannie's & Freddie's liquidity with legislation to certify the guarantee coming later. If Congress advised Bernanke not to make the guarantee and he did it anyway, it would be technically legal, but there would be such an uproar that the "emergency powers" would likely be revoked.
So, the Fed plays games with your money, but they do have a heavy amount of regulation. It's not complete corporate ownership.