Conversations on more than 50 actions to expand freedom in the United States
"Momentous changes are under way in what central banks are and what they do. We're accustomed to thinking that central banks' main task is to guide the economy by setting interest rates. Their main tools used to be "open market" operations, that is, purchasing short-term Treasury debt, and short-term lending to banks."
"Since the 2008 financial crisis, however, the Federal Reserve . . . has crossed a bright line. Open-market operations do not have direct fiscal consequences, or directly allocate credit. That was the price of the Fed's independence, allowing it to do one thing—conduct monetary policy—without short-term political pressure. But an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials." (Prof. John H. Cochrane, writing in the Jan. 25, 2013 issue of the Hoover Digest and reprinted in the Wall St. Journal, February 19, 2013.)
The Federal Reserve Bank, created by Congress in 1913, is a bank for banks. After President Nixon switched from gold-based currency to fiat-based currency by ending the convertibility of dollars to gold in 1971, the Fed has had the ability and authority to create money out of thin air. The Fed has caused (some) banks and the federal government to become the best of friends.
If the Fed does too much of this, we get careless in how we use the funds we’ve borrowed We bid up the price of real goods and services that other more prudent investors could have used to create something their customers would actually like to buy.
The result will be inflation. Inflation doesn’t happen because the price of something like oil goes up, because, if I continue to buy oil, I’ll buy less of something else. Inflation happens when the Fed increases the supply of money chasing the goods and services available.
Another result could be a boom, like dot.com or housing. That’s how booms occur. And every boom results in a bust. But the Fed and its buddies will say it was because of greed and failure of the free-market and can be corrected by more regulation and intervention by the same people who created the boom.
If things get overheated, the Fed says it can reverse this “open-market operation” when it bought bonds from your bank. It can go back into the market and sell the bonds it bought. We’ll see. If inflation is looming, the government, which created the Fed, might pressure the Fed to let inflation run to make it easier for the government to pay off its massive debt to us and to the Chinese and others.
There’s something else the Fed does. It sets the interest rate at which banks can lend the funds it has at the Fed overnight to some other bank that will need more cash in the drawer tomorrow when its depositors write checks and withdraw funds.
In February 2006 this “federal funds target rate” was 4.5% and an average one-year CD would yield 5.4%. In 2009-2010 the rate is near zero and the average one-year CD yield has dropped to 1.3%. The interest paid on $7.5 trillion in short-term checking and savings accounts, retail money funds, and CDs is hundreds of billions of dollars less than it would have been at 2006 interest rates. (Charles R. Schwab, Opinion, Wall Street Journal, A19, March 30, 2010)
The Fed’s “open-market operations” buying bonds from banks and letting the banks borrow at almost no cost has made bank ownership very profitable. But it’s hitting hard the millions who saved throughout their lives for retirement and it’s not encouraging the young to become savers. Inflation will be even more discouraging.
It’s no wonder that the Fed, even though it has no real resources to inject into the economy, has made (some) banks and the federal government the best of friends.
In its largest single intervention in the U.S. economy, the Federal Reserve purchased, from January 2009 to March 31, 2010, $1.25 trillion in mortgage-backed securities. That's about $4,000 for every man woman and child in the United States. "The purchases caused rates for 30-year mortgages, which exceeded 6 percent in late 2008" to go to "slightly above 5 percent" April 1, 2010. (Sewell Chan, New York Times, March 31, 2010). Now that the Fed is stepping out, "private investors appear to be stepping in."
Sen. Rand Paul (R-KY) has introduced Audit the Fed (S. 209) in the U.S. Senate to put an end to policies that are bankrupting every man, woman, and child in the United States."Even after 2012's "QE3"…Continue
Started by Daniel Dyer Feb 9, 2013.
The Sound Dollar Act (H.R. 4180) would give the Fed a single mandate: to maintain price stability.No longer would the Fed be able to use its other (dual) mandate, maintaining full employment, as its…Continue
Started by Daniel Dyer Apr 26, 2012.
H.R. 459 - The Federal Reserve Transparency Act of 2011, "To require a full audit of the Board of Governors of the Federal Reserve System and the Federal reserve banks by the Comptroller General of…Continue
Started by Daniel Dyer. Last reply by Daniel Dyer May 3, 2011.
There are various reports that the Federal Reserve Bank, created by Congress in 1913, had a 99-year charter which expires December 12, 2012.
Started by Daniel Dyer Mar 26, 2011.