Question

Explain the theory of bureaucratic behavior. How does the Federal Reserve Bank display this behavior?

Answer 1

Explain the theory of bureaucratic behavior

The Bureaucratic Theory is related to the structure and administrative process of the organization and is given by Max Weber, who is regarded as the father of bureaucracy. What is Bureaucracy? The term bureaucracy means the rules and regulations, processes, procedures, patterns, etc. that are formulated to reduce the complexity of organization’s functioning.

According to Max Weber, the bureaucratic organization is the most rational means to exercise a vital control over the individual workers. A bureaucratic organization is one that has a hierarchy of authority, specialized work force, standardized principles, rules and regulations, trained administrative personnel, etc.

The Weber’s bureaucratic theory differs from the traditional managerial organization in the sense; it is impersonal, and the performance of an individual is judged through rule-based activity and the promotions are decided on the basis of one’s merits and performance.

Also, there is a hierarchy in the organization, which represents the clear lines of authority that enable an individual to know his immediate supervisor to whom he is directly accountable. This shows that bureaucracy has many implications in varied fields of organization theory.

Thus, Weber’s bureaucratic theory contributes significantly to the classical organizational theory which explains that precise organization structure along with the definite lines of authority is required in an organization to have an effective workplace.

How does the Federal Reserve Bank display this behavior

The Federal Reserve, the U.S.’s independent central bank, impacts the lives of U.S. citizens on a daily basis. Some of its actions touch close to home and are closely followed and scrutinized while others are little known, although all their decisions make an impression on individuals. Although this article is going to focus on the effect of the Federal Reserve on individuals, a brief description is beneficial. For more in-depth information, its website is extremely helpful.

Who is The Fed?

The Federal Reserve commonly referred to as the “Fed” is part of the U.S. Federal Government, but is an independent office, meaning it can make decisions without approval from the President or Congress and it should be “free” of party politics (although appointees come from the President and are approved by Congress). According the its website, the Fed has three specific goals: maximum sustainable employment, stable prices, and moderate long-term interest rates. It accomplishes its goals with four basic duties: conduct monetary policy, supervise banks, maintain stability of the financial system and provide financial services to the banking system.

The Fed acts behind the scenes to touch our lives in many ways –from clearing checks that we cash to processing electronic transfers or payments we make through our online bill pay accounts or when we transfer money from one account to another. But it also influences our lives in less obvious ways.

The first of its four duties –to conduct monetary policy- is often discussed in the media because it has widespread impact on an individual’s ability to purchase goods or services. There are several illustrations of this. The Fed controls or regulates interest rates, so, for example, if you want to buy a bond, it impacts what rate you will get paid and the price of the bond or if you want to buy a house, it impacts the mortgage rate. It accomplishes this in a few ways, one of which is to lower the interest rate it charges banks. When a bank borrows money from the Fed to lend to individuals, if the interest rate that bank needs to pay is lower, then it is cheaper for banks to lend and they will charge a lower rate.

Similarly, it can influence the ability of companies to hire employees. If the Fed expects an economic slowdown and wants to create more jobs, it can provide more money to banks to lend to businesses so they can hire. Or if it believes the consumer (that’s you and I) needs to spend more money so that businesses can make more and hire more, then it can lower interest rates so that car loans, home loans, and credit card interest rates are cheaper for us.

Two of its other duties center on supervising and providing services to banks. The Fed can change the level of cash reserves banks are required to maintain so that banks can lend more or less money. Like their regulation of interest rates, changing the level of cash reserves helps individuals access loans to buy cars or homes or go to college and the businesses they buy from benefit with higher sales revenue which should translate into an increased willingness and ability to hire more people.

On the flip side, the Fed also monitors banks to ensure that savings deposits are safe and the bank does not overstretch itself so that it will not run out of cash.

Its final goal, to maintain stability of the financial system, can be accomplished by increasing or decreasing the money supply. An example is when the Fed buys securities in the market, like U.S. government Treasury bonds, which increases the amount of money in circulation. If the amount of money is too great and inflation starts to increase, the government can reduce buying activity or raise rates, which will in effect squeeze off consumer spending and borrowing. This is one of the tightropes the Fed needs to walk--the level of “printing” money (the supply of money in circulation). Increasing the supply may initially feel good to the consumer, but it is not all puppy dogs and roses for long; there is a downside to all this money printing! The more supply of dollars in circulation, the less they are worth, so the fewer goods we can buy with the same amount of money (in other words, it takes more dollars to buy the same good)