November 7, 2015

Word: The Federal Reserve

James McCusker, Everett Herald, WA - The Federal Reserve was designed to create a balance between regional interests and, equally importantly, to keep it out of the hands of the Congress or the President. It seemed impossible to do this, but the increasing intensity of the financial panics (just as Marx predicted) scared the impossibility out of us and the Federal Reserve Act was signed into law by Woodrow Wilson in 1913.

One hundred and two years later, the organization of the Federal Reserve is still boring to most people and a cabal to others — but it is a structure that continues its independence from Congressional politics. That has not eliminated differences of opinion, but dissenting views are generally voiced at the board meetings and operational committee meetings that decide monetary policy. The public can read about these opinions and views in the published minutes of the meetings.

The Fed’s control of interest rates is indirect. It doesn’t order banks to raise or lower rates, but achieves these changes through the financial markets where it buys or sells Treasury securities depending on which direction it wants to take the economy. The system may be boring to some people but it is understood by large numbers of decision-makers and people who work on the front lines of the financial markets.

The Federal Reserve is not a perfect system but there are few secrets in it. More importantly at this point, though, is that its policies and actions are driven by imperfect information as to what is really going on in our economy. We should worry less about conspiracies and cabals, and more about that problem. It’s very likely at the top of the Fed’s worry list.



Anonymous said...

Someone needs to go watch the American Dream Cartoon; it's a nice simple introduction to the nature of the Fed, banks, etc.

greg gerritt said...

All policy is based on growth that is gone and never coming back, therefore all the policies are designed not to work.

joel wendt said...

The real problem is a bit ancient, perhaps far before the American Revolution. This problem is the creation of currencies that become permament fixtures of the economy ... i.e. wealth made out of nothing. 99.99% of the wealth in the world is fake - there are no real goods and services being exchanged, only "instruments" of various kinds whether paper currencies, futures, and stocks and bonds traded after the original issue. Right now the air is slowly going out of the biggest bubble of all - the finance bubble. It can't be stopped, and we can only survive the collapse of the world economy that is coming. Link that collapse to Climate Change, food issues, water issues, disease issues, and endless reasons for war, civilization is failing. The situation with the Fed is but a pimple on the behind of a donkey that is dying. Make friends with your neighbors.