The Social Fabric Matrix Approach to Central Bank Operations- An Application to the Federal Reserve and the Recent Financial Crisis

Abstract

This chapter utilizes the social fabric matrix approach (SFM-A) to provide a detailed description of the Federal Reserve’s (Fed’s) daily operations and the recent financial crisis. The SFM of the Fed’s operations presents the primary components- major norms, institutions, technologies- relevant on a day-to-day basis. The SFM is then used for normative systems analysis (Hayden 1998) to show the articulation of major norms via sub-criteria, rules, regulations, and requirements into significant influences on the actions of authorizing and processing institutions in the Fed’s operations. From the normative systems analysis, three types of time- intraday, maintenance period, and seasonal- in the Fed’s daily operations can be explained. Overall, the Fed’s operations are driven by the goals of stabilizing the payments system and the financial system. Other major norms, such as market efficiency, are important in terms of their influence, but they can become counterproductive to the Fed’s ability to stabilize the payments system and the financial system at times, as they were during the mid-to-late 1990s. Given the SFM, normative systems analysis, and description of time and timeliness in the Fed’s operations, seven general principles of the Fed’s operations are presented, several of which are contrary to popular opinion (even among economists) regarding how central bank operations actually work. Of overarching importance is the realization that the Fed’s operations are concerned with setting an interest rate, not controlling the money supply, which is in fact not possible. The events of August 2007 through December 2008 relevant to the Fed’s daily operations are described and considered within the context of the previously laid out general principles, while as a result of information gathered during this period, three additional general principles of the Fed’s operations are provided.

Keywords: social fabric matrix, Federal Reserve, monetary operations, central banking, federal funds market, interest rate targeting, payments system, payment settlement

JEL Classification: E42, E43, E44, E51, E52, E58, E61, G18, H10