8 Important Facts About the Federal Reserve 33 comments
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These are just facts, not conspiracy.
- The Federal Reserve is a private institution. It is owned by the 12 regional Federal Reserve banks, which are each in turn owned by a combination of regional banks, commercial banks, foreign banks, and miscellaneous individuals who have inherited pieces passed down through generations. (Rockefellers, Rothschilds, etc.)
- The Federal Reserve holds a monopoly on the issuance of currency in the USA. In essence, this is the power to borrow an infinite amount of money at 0%. The dollar bill in your pocket is a 0% loan to the Federal Reserve. The Federal Reserve then uses these 0% loans to purchase income-producing assets. Before 2008, the assets purchased were primarily Treasury debt, which is backed by the taxation power of the US Government. In other words, we are exchanging the property rights to our valuable assets (land, labor, entrepreneurship) for little slips of green paper to buy trinkets with. The government can then tax these valuable assets to pay for our excess. The more we spend, the more the Fed owns.
- If all money created is debt and counts as principal, where does the money come from to pay interest on this debt? It comes from the money that gets printed in the future. This is why inflation is a natural result of our current monetary system.
- Prior the the Emergency Economic Stabilization Act/TARP Act of September 2008, commercial banks were required to hold 10% of deposits as reserves. This placed a limit on the potential amount of money creation at around 9x the original deposit. An obscure clause in the TARP Act changed the reserve requirement to 0%, immediately making the potential money supply infinite.
- The reason for the credit spread blowups of October/November 2008 was because in the same TARP Act the Fed was allowed to pay interest on deposits without publicly stating the interest rate. Before the TARP Act, there was around $20 billion deposited by commercial banks at the Fed. After the TARP Act, deposits immediately jumped 50x to $1 TRILLION. This resulted in a disappearance of demand for risky assets, which led to blowouts in credit spreads.
- As a result of various acts of Congress in 2008, the Federal Reserve now has the authority to buy all sorts of assets (commercial paper, corporate bonds, mortgage loans, etc.). A cynical person would say this essentially allows the Fed to seize all valuable assets in this country directly by exchanging fancy bits of green paper for them without having to go through the intermediate step of coercing the US Government into spending more money and taking on more debt.
- Much of the Fed's activity is not made public because of the use of off-balance sheet vehicles.
- There is debate over the constitutionality of the Fed's various awesome powers.
What does this all mean? This economic crisis will not become a depression. By employing the new tools of monetary policy that the Fed has created for itself (interest on reserves and direct asset purchases), the money supply can be jerked around as if on a string. Initially, this means we will soon experience another period of easy credit and unsustainable economic growth.
However, the end result of current policies is that the Fed will be powerless to stop the next economic crisis. Assuming no outside shocks (another big war, nuclear attack, etc.), the dollar will over time lose its status as the reserve currency, and we will experience a currency crisis followed by rampant inflation at some point down the road.
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This article has 33 comments:
still solvent. Keep them printin' presses hummin'!
Uhh, no. Credit card companies are pulling back credit, banks aren't lending unless the borrower meets strict criteria, and companies and consumers don't want more credit.
How is it that all these articles on SA miss this obvious fact?
How is it that all these articles on SA miss this obvious fact?"
I agree patio. I'm not sure why most people think this current environment will be so short in duration. If there isn't a credit-worthy borrower of the reserves the Fed is issuing then there is no printing.
We do not have a "Central Bank". Someone should tell Congress, the Administration, Greenspan, Bernanke and a bunch if ignorant economists who got the education from other ignorant economists.
The "Central Bank" concept was personna non grata in the forties, fifties and sixties. It smacked of a type of "Industrial Policy, once espoused by Robert Reich and the Clinton Administration. Fortunately, it was shot down in flames but expect it to reemerge in the Obama Administration - the government will try to pick winners and losers and we all will be losers.
The schism between Capitalist and Free Market Entrepreneurs is that al Capitalists want own monopolies and the Free Market supporters put in anti-trust laws just to prevent that. Libertarians, support Free Markets and anti-trust laws, thought to some who don't get it this is contradictory.
It is interesting how politicians pervert Capitalism in the name of Free Markets - two concepts that often clash such a "National Banking" and Glass-Steagall. This may sound like I am straying from the point but "Central Bank" and "Industrial Policy" are bedfellows.
Mathematically, our financial system will implode eventually. This will provide the opportunity to re-learn that these systems can be built however we choose.
The first crucial step is that enough people need to actually take an effort to understand what money is and how our financial systems actually work. The current downturn is certainly encouraging people to begin that education.
This article is in a great example of that process in action.
Not to mention the demographic shift- boomers are of an age when they would down-size anyway, but will now down-size on steroids. They have to save, get out of debt, they don't have the time to do anything else.
The world has seen trillions of dollars of wealth disappear, its gone. House will not reflate, I very much doubt stocks will reflate appreciably, anytime "soon". Does anyone see the path where things are booming again, and the lost jobs are replaced , "soon"? What could possibly drive wages up?
On Jan 18 10:39 AM rkruse53@yahoo.com wrote:
> patio, you are right, for now. I think the author is looking down
> the road a year or two (or more).
Thanks for the info!
#4. Can you quote us the exact clause that changed reserve requirements to 0%? If this was the case, then ALL banks are instantly well-capitalized since the reserve requirements have effectively been removed. Thus there is no need for the FDIC to even exist.
#5. The blowout of credit spreads happened prior to October 1st (when the Fed started paying interest on deposits). Don't you think the downfall of LEH, AIG, FNM, FRE, WB, WM in one month could have done something to this? The Fed is STILL paying interest on deposits, yet the credit spreads have narrowed to pre-Lehman levels. The flight away from risky assets is very predictable in a volatile market because, well, they are indeed risky. I believe your cause-and-effect hypothesis is very wrong. The current 1-year LIBOR rate is the lowest since May 2004. See: www.moneycafe.com/libr...
On Jan 18 10:23 AM patio wrote:
> "Initially, this means we will soon experience another period of
> easy credit and unsustainable economic growth."
> Uhh, no. Credit card companies are pulling back credit, banks aren't
> lending unless the borrower meets strict criteria, and companies
> and consumers don't want more credit.
> How is it that all these articles on SA miss this obvious fact?
Here's what I want to read
How the US federal reserve differs from the practices of other national or bloc central banks...and how our fiat policies compare.
Gimmie some well researched and quantitative difference in central banks all around the world and outlining policies, public disclosure, reserve requirements, etc.
www.endthefed.us/repea...
- The private nature of the Fed makes it distinct from any other central bank. To the extent it is the key decision maker, the U.S. constitution is irrelevant.
- International comparisons of behaviour are difficult because the Fed supplies no broad money figures and, anyway, M2, M3 etc operate somewhat differently in different countries. The Fed's narrow targetting of CPI inflation is typical internationally. But, its monetary policy (now and pre the 08 crash) would seem to be atypically loose for a "sound" economy. Intenational markets are awash with U.S. $s and the Fed does not move to sanitiize capital inflows becasue of the U.S's hunger for credit to finace its debt.
- If the Fed keeps printing, eventually it can (more than) counterbalance reduced consumption or lending. It can print faster than you can save. If it overshoots, then you will you wish you hadn't saved so much!
See: seekingalpha.com/artic...
On Jan 18 10:48 AM bobomite wrote:
> The debt-based economic model that we use today was evolved in the
> 1800s. The long-term effects of bringing money into existence as
> debt without creating the money to pay interest have taken many years
> to fully understand. There is nothing sacred about our system; it
> is just what we are used to.
>
> Mathematically, our financial system will implode eventually. This
> will provide the opportunity to re-learn that these systems can be
> built however we choose.
>
> The first crucial step is that enough people need to actually take
> an effort to understand what money is and how our financial systems
> actually work. The current downturn is certainly encouraging people
> to begin that education.
>
> This article is in a great example of that process in action.
Oh, and by the way, mark my words well.....the 2nd half of 2009 - the timeframe I am now hearing more and more as the point things will start to improve - will turn out to be the lowest point yet for many reasons yet to unfold to the media, analysts and public who by now have had enough of the ride down and are grasping for any signs of life to make it seem like the bus is turning around and create a self-fulfilling prophecy.
On Jan 18 04:43 PM John Polomny wrote:
> Uh yes. The FED is buying $500 billion in MBS. Somebody owns them
> and they will take that money and spend it or invest it in corporate
> bonds. municipal bonds, or whatever. The FED can continue to expand
> its balance sheet and buy assets. Libor and the TED spread are both
> comng down so the credit matkets are lossening not tightening. Go
> to the St. Louis FED website and look at the data.
Prime Rate?
Mortgage Rates?
When will interest rates start moving north?
These are "given" or "conclusions" in theoretical assumptions which the carpenter or the auto mechanic mistakes as "facts" when he diagnosis the economy an arm's length away from his nosey face. Hardly out of the "facts" discussed by "street experts" so far are relevant to central banking in the economy, much more to the role of the United States Federal Reserve as the core of our push-button [fantastically advance] economy and the engine not only of the national economy but for the growth of the global economy, based on the adage that when we sneeze the world catches cold!
The problem here is that little knowledge is dangerous. There is no space to explain this to those who pretend to know. The ignorant has no fear of contradiction and will invade any territory of knowledge to cover up such ignorance. Just like when the blind is fearless when crossing a busy street. The blind can only feel but cannot see the danger ahead. If you believe him that he sees no danger ahead, you just missed the point -- the guy is blind!
If you are in the financial arena and you "think" you know something about the federal reserve and have not seen the following video.....you are only fooling yourself....
video.google.com/video...
Well done Jeff
Is there a downside to this exercise of power to print money to build the great railways and the incomparatble U.S. highways that linked all states in the country, constructs our tallest skyscrapers and create our multibillion-dollar institutional infrastructures, etc. for the good of the commonseal or to make how this nation looks like today? Of course there is always a downside, part of the material and social capital costs -- every exercise of power has. But the Fed also administers relief as a result of unavoidable foul-ups. Besides, take note that corruption thrives in honesty, just as in corruption there can be also an exceptional honesty.The complaints of the people in fringe are louder in the outback. When the economy is sick, the remedial pill is always bitter to swallow. But let's live in the real world, not in the world of the Wizard of Oz. There will be no collapse of the economy that toothless tigers pictured worse than that of the 1920s. That's fantasy in a science fiction story that could win this year's Academy Award!
The problem is the ability of the Fed to print up the money for the use of the US Gov't to finance their overspending, and then charging interest on it. Since the interest doesn't exist, it will continue to increase exponentially no matter how small the % rate is. One doesn't have to look to deep to see the problems here.
On Jan 20 10:38 PM Lokonomist wrote:
> In the video.google.com/video... you will see that the revolutionary
> colonies would not have won the revolution had it not printed paper
> money to finance the struggle. It was called "colonial script" with
> hardly any equivalent reserve. They did what the Bank of England
> did, like what the Federal Reserve had done --exercise the power
> the people had delegated through Congress to print paper money to
> spend for development, which made this nation the greatest on the
> planet! Borrowing is not like Medusa's head that turn everyone to
> stone! In this regard, only the ignorant jumps into an empty swimming
> pool.
>
> Is there a downside to this exercise of power to print money to build
> the great railways and the incomparatble U.S. highways that linked
> all states in the country, constructs our tallest skyscrapers and
> create our multibillion-dollar institutional infrastructures, etc.
> for the good of the commonseal or to make how this nation looks like
> today? Of course there is always a downside, part of the material
> and social capital costs -- every exercise of power has. But the
> Fed also administers relief as a result of unavoidable foul-ups.
> Besides, take note that corruption thrives in honesty, just as in
> corruption there can be also an exceptional honesty.The complaints
> of the people in fringe are louder in the outback. When the economy
> is sick, the remedial pill is always bitter to swallow. But let's
> live in the real world, not in the world of the Wizard of Oz. There
> will be no collapse of the economy that toothless tigers pictured
> worse than that of the 1920s. That's fantasy in a science fiction
> story that could win this year's Academy Award!
Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.
The punishment for making false statements or reports which overvalue an asset is also stated in the U.S. Code:[27]
Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way...shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Congressional Oversight
The keys for Congress are to clearly establish a viable objective for the Federal Reserve and to ensure the Central Bank is fully accountable for achieving this goal. This can be fostered by establishing appropriate incentives for monetary policy makers as well as mandating enhanced reporting and disclosure requirements related to progress in achieving stated objectives. Oversight, therefore, should promote policy transparency which can help to promote the credibility of a given monetary policy.
On Jan 18 10:23 AM patio wrote:
> "Initially, this means we will soon experience another period of
> easy credit and unsustainable economic growth."
> Uhh, no. Credit card companies are pulling back credit, banks aren't
> lending unless the borrower meets strict criteria, and companies
> and consumers don't want more credit.
> How is it that all these articles on SA miss this obvious fact?