Federal Reserve
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Oh, the irony! The chairman of the Federal Reserve Board for two decades (1986-2006) was [[Alan Greenspan]], a former disciple of [[Ayn Rand]]. | Oh, the irony! The chairman of the Federal Reserve Board for two decades (1986-2006) was [[Alan Greenspan]], a former disciple of [[Ayn Rand]]. | ||
===Maiden Lane and the financial crisis=== | ===Maiden Lane and the financial crisis=== | ||
| − | During the [[banking crisis]] of 2008, the answer to "What does it do?" became "buy loads of toxic assets from failing banks." The Fed created a number of dummy corporations (sorry, "special purpose vehicles") called Maiden Lane I, II, and III to buy up crap from Wall Street and government-sponsored entities Fannie Mae and Freddie | + | During the [[banking crisis]] of 2008, the answer to "What does it do?" became "buy loads of toxic assets from failing banks." The Fed created a number of dummy corporations (sorry, "special purpose vehicles") called Maiden Lane I, II, and III to buy up crap from Wall Street and government-sponsored entities Fannie Mae and Freddie Mac. This has raised the issue of the legality of the Fed's actions during this period.<ref>Chad Emerson. [http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1004&context=wmblr The Illegal Actions of the Federal Reserve: An Analysis of How the Nation's Central Bank Has Acted Outside the Law in Responding to the Current Financial Crisis.] ''William & Mary Business Law Review'', vol. 1, iss. 1</ref> A subsequent, full audit of the Fed revealed numerous conflicts of interest in the deals.<ref>[http://www.washingtonpost.com/business/economy/federal-reserve-audit-highlights-possible-conflicts-of-interest/2011/07/21/gIQAJbbnSI_story.html Federal Reserve Audit Highlights Potential Conflicts of Interest], [[Washington Post]]</ref> In what became nicknamed the "backdoor bailout," the Fed provided $3.3 trillion in liquidity and $9 trillion in short-term loans and assistance to Wall Street and foreign banks.<ref>[http://www.commondreams.org/headline/2010/12/02-7 Fed's 'Backdoor Bailout' Provided $3.3 Trillion in Loans to Banks, Corporations], ''The Nation''</ref> |
==What's wrong with the anti-Fed crankery?== | ==What's wrong with the anti-Fed crankery?== | ||
Revision as of 21:23, 15 September 2011
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The Federal Reserve, often referred to as "the Fed", is the central bank of the United States, established in 1913 by the Federal Reserve Act.
What does it do?
The Fed essentially controls the amount of cash money in the United States and sets monetary policy. It has 12 branch banks (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco) which loan money to banks within their respective regions. When one of the banks determines that the cash supply is too low in its area it will place an order with the Treasury Department to print/mint more bills or coins (or, more often, digitally mark up accounts these days). This money is then lent at an interest rate to banks who then lend it to people and businesses. Previously the money supply was effectively in the hands of various Wall Street movers and shakers (e.g. J.P. Morgan).
Oh, the irony! The chairman of the Federal Reserve Board for two decades (1986-2006) was Alan Greenspan, a former disciple of Ayn Rand.
Maiden Lane and the financial crisis
During the banking crisis of 2008, the answer to "What does it do?" became "buy loads of toxic assets from failing banks." The Fed created a number of dummy corporations (sorry, "special purpose vehicles") called Maiden Lane I, II, and III to buy up crap from Wall Street and government-sponsored entities Fannie Mae and Freddie Mac. This has raised the issue of the legality of the Fed's actions during this period.[1] A subsequent, full audit of the Fed revealed numerous conflicts of interest in the deals.[2] In what became nicknamed the "backdoor bailout," the Fed provided $3.3 trillion in liquidity and $9 trillion in short-term loans and assistance to Wall Street and foreign banks.[3]
What's wrong with the anti-Fed crankery?
While one can find many legitimate criticisms of the Fed (incompetence, cronyism, etc.), much of the opposition to the Fed comes from a basic misunderstanding of how it operates or a conspiratorial view.
Conspiracy theories
The Fed has been a frequent subject of conspiracy theories alleging the Fed creates inflation, recessions, and even the Great Depression, through manipulation of the money supply. Father Coughlin, the John Birch Society, Liberty Lobby, Eustace Mullins, Pat Robertson, Alex Jones, Texe Marrs and several others have frequently expressed such conspiracy theories. In some (but not all) cases these conspiracy theories have an anti-Semitic component, alleging "Jews" secretly or openly control the Fed. These theories are furthermore sometimes tied in to other conspiracy theories about the Trilateral Commission or the New World Order, or manipulation of the U.S. economy by the Rockefeller and Rothschild banking families.[4]
It seems like many of Ron Paul's followers have come up with a new completely insane theory in 2011 about the Federal Reserve, borrowing some points from Lyndon LaRouche. Apparently the Federal Reserve is now a foreign banking institution controlled by the British, and Britain is now firmly in control of the Rothschild family. They are making the national debt increase, through their control of the Federal Reserve, to the point where they can take their former colony back. The only person who can save the US is now Ron Paul,[5] who is above the influence.[6]
Ownership
Critics of the Fed make a big deal out of the fact that the Federal Reserve is a private corporation partially governed by the same banks it is supposed to regulate rather than a federal government agency. So what? This is similar to the status of Amtrak, Fannie Mae, Freddie Mac, the Tennessee Valley Authority, and the United States Postal Service, all examples of other major clusterfucks. Of course, being a major clusterfuck is not synonymous with being a conspiracy controlling the world -- indeed, they are almost complete opposites.
There is also the misconception that the Fed is completely independent or private. This is false as it is a quasi-public entity. The Fed, like most central banks in the world, is considered "independent," which is basically a term of art meaning that its day-to-day operations are not overseen by the federal government. However, its chairman and board of governors are appointed by the president. It is also subject to Congressional legislation.[7] Under the Full Employment Act of 1946 and the Federal Reserve Reform Act of 1977, the Fed has a dual mandate to work toward full employment and to curb inflation and deflation (i.e., price stability).[8] It is also subject to certain types of audits by the Government Accountability Office (GAO).
Trouble with accounting identities
At the simplest level of anti-Fed crankery is the idea that the Fed "owns" the government. This is due to a misconception of how the Fed operates. Monetary cranks claim that the Fed lends money to the government at interest, thereby stealing "the people's" money and selling us into debt slavery or some similar nefarious scheme to take over the US government. The way this works, however, is not quite the same as your regular commercial bank. The interest on debt held by the Fed actually goes to two places: One, the Fed pays itself out of this interest to cover its own operating costs, and two, the rest of the interest is rebated to the treasury. So, no, the Fed does not own the government or sell us into debt slavery.[9]
Pseudolaw
This usually ties into the above point: The basic idea is the the Constitution gives Congress the power to coin money, so the Fed is unconstitutional because it is not the Congress. This is a pseudolegal argument because the Congress may delegate its powers. This is similar to pseudolegal arguments made by gold bugs.[10]
Austrian school and free banking proponents
Much of the opposition to the Fed in non-conspiratorial circles (though there is some overlap) comes from the Austrian school, who are free banking proponents and generally draw on Ludwig von Mises' arguments against central banking. Ron Paul is particularly known for his multi-decadal anti-Fed crusade in Congress. In short, they claim that the Fed creates the business cycle[11] through the expansion of the money supply which leads to "malinvestment" due to easy money.
Ignoring Lessons from the US Free Banking Era (1837 to 1864)
The biggest flaw with the free banking proponents is they either are ignorant or ignore the many problems seen in the Free Banking Era of the US.
The first problem was that during this era banks issued bank notes based on the gold and silver in their vaults effectively printing money. Since these bank notes could only be redeemed at face value at the bank that issued them the result was the actual value of the note decreasing the further from the bank it got. Then there was the issue if the bank failed these bank notes became worthless. This made any form of long distance commerce difficult if not impossible.
The second problem was since the laws were set up by the individual states there was no consistency with regard to reserve requirements, interest rates for loans and deposits, capital ratios, or anything else. Worse enforcement of what laws there were was highly variable within a state. This resulted in some states what was later called wildcat banking where the bank notes were not backed by precious metal at all but by mortgages or bonds.[12] In other words the exact same problems as are claimed regarding the Fed but with even less oversight.
Ignoring the original Great Depression (1873–79 or 96)
Before the Crash of 1929 the Great Depression refereed to the period of 1873–96 which was marked with deflation largely because the US shifted from a bimetallic standard to a de facto gold standard in 1873 and the rapid industrialization of the country. The term Gilded Age is also applied to this period and sometimes in a pejorative manner--a shiny golden cover hiding a rotting or rotted core. The deflation that marked this period is why some wanted to return to a bimetallic standard as hammered home in William Jennings Bryan's famous Cross of Gold speech in 1896. Even the shorter range of 1873–79 stated by the NBER is longer then the 1930's Great Depression by 22 months. The lesson the Long Depression as it now is called gives us is that switching over to a gold standard (which the Coinage Act of 1873 effectively did) triggers off deflation for extended periods of time.
After the establishment of the Fed
The US only saw three major banking crises after the establishment of the Fed (Great Depression, S&L crisis, 2008 financial crisis) and only two since the creation of federal deposit insurance compared to one about every decade prior to that.[13] The business cycle has also seen shorter and smaller contractions.
Essentially, what this demonstrates is that certain libertarians[14] and Austrian schoolers like Ron Paul seem to love the idea of going back to the 19th century and having us all stuff gold bricks under our mattresses every time it looks like there's going to be a run on the bank.
See also
- Ben Bernanke, current Fed chairman
- Fractional-reserve banking, also controlled by the Jews or selling us into debt slavery...or something.
- Zeitgeist, helped to revive the conspiracy theories
External links
- The Fed's website
- Debunking Federal Reserve conspiracies
- Federal Reserve myths
- Debunking Zeitgeist's segment on the Fed
- The Fed - Tool of the New World Order or Jewish Conspiracy? Part I, Part II
- Rethinking Central Banking, Brookings Institution
- Structure and Function of the Federal Reserve System, Congressional Research Service Report
Footnotes
- ↑ Chad Emerson. The Illegal Actions of the Federal Reserve: An Analysis of How the Nation's Central Bank Has Acted Outside the Law in Responding to the Current Financial Crisis. William & Mary Business Law Review, vol. 1, iss. 1
- ↑ Federal Reserve Audit Highlights Potential Conflicts of Interest, Washington Post
- ↑ Fed's 'Backdoor Bailout' Provided $3.3 Trillion in Loans to Banks, Corporations, The Nation
- ↑ Jewish "Control" of the Federal Reserve: A Classic Anti-Semitic Myth, Anti-Defamation League
- ↑ Youtube - Hwy Ron Paul can Save us All
- ↑ The Federal Reserve: History of Lies, Thievery, and Deceit
- ↑ Federal Reserve Bank Ownership, FactCheck
- ↑ The Fed's dual mandate dates to a 1946 act, Washington Post
- ↑ Myth #8
- ↑ The Importance of the Federal Reserve, Joint Economic Committee Report, Mar. 1997
- ↑ Not as part of a conspiracy, though. They claim that any government interference in the market necessarily "distorts" it. Thus, it is through the incompetence of bureaucrats and the impossibility of regulating the market efficiently.
- ↑ Wildcat banking Investopedia definition
- ↑ See the Wikipedia article on List of banking crises.
- ↑ Even arch-libertarian Milton Friedman didn't want to get rid of the Fed. He actually proposed replacing it with a computer that would just spit out money as economic growth occurred.