Originally posted by: LegendKiller
I'll start off with my traditional post.
Here's a nice dose of reality for RPbots who think the Fed is evil. Try to reply to it, if you can.
1. The Fed is *not* a private company. It operates under Congressional mandate and is owned 100% by the member banks within the system. *Every* bank that is part of the Federal Reserve system, which is more or less every bank in the country, ownes shares in that system. This includes Bank of America, JPMorgan Chase, Bank of New York Mellon, Wachovia, Washinton Mutual, LeSalle, TFC, Wells Fargo, Bank Atlantic, Commerce Bank, 5/3rd, or any other bank you can think of. Since those banks are *PUBLIC* companies, the Fed is essentially owned by *EVERYBODY* in the country.
Publicly traded does not mean "Owned by everyone." Everyone with the financial means can "buy into" the system by buying shares in the companies. However, the controlling interests are secured by people with much more wealth than you or I could accumulate in our lifetime. The Fed is Privately controlled with congress having the ability to audit the policy but not mandate it. The only power Congress has over the Fed is to abolish it.
People think that the Fed should be abolished and that Congress should take over managing the currency. Sure. Perhaps 200 years ago when we didn't vote in dipshits. However, the short-term nature of Congressional "worries" (aka, getting re-elected) and the long-term concern of managing the economy, are not congruent. Thus, the two should absolutely be delinked.
Congress is likely to make mistakes in fiscal policy due to election pressures, but that's the point. They would/should be held accountable for the fiscal policies they implement and those who fail to steer policy in the PUBLIC'S best interest are/should be voted out and someone with better ideas and values can replace them. Private bankers who stand to make immense profits with money they don't even have to begin with do not have OUR best interests at heart, they have their best interests at heart and could give 2 shits about Joe Sixpack. There are certainly advantages to having the monetary system removed from "election pressures" but those advantages are quite easily negated by greedy power hungry private bankers.
The Fed is also very secret because, if it weren't, then the markets would be extremely volatile. Looking into the Fed on a minute basis would be akin to allowing people direct access to *every* board of directors of *every* company for *every* meeting. That would introduce tremendous problems, as people tossing around ideas, problems, solutions, and long-term projections would then be prone to conjecture in the market. The financial markets would be so stutter-stopped and jagged by the news that risk would skyrocket. Asking for a lot more transparency would stifle the Fed's ability to manage thigns on a long-term basis.
Allowing sight into the policies of the Fed would likely stabilize the markets. No more speculating that interest rates will be raised/lowered. Open predictable market adjustments could/would remove a great deal of "speculative buying/selling.
The Fed pays the government more than 80bn in revenue per year. *ALL* profits go to the government. Profits are from revenues on lending money to all banks, that money is from member banks and the government. The interest charged by the Fed, from banks, is then dividended out to the member banks (they deserve return for their lending), the remainder goes to the government.
The Fed itself may pay the government based on it's operations, but the member banks that set the policy do not.
2. Get a clue about the "government". WE spend the money the way WE want it. People try to pretend that the government is not representative of us, yet we vote them in. The Fed acts in accordance with the needs of the government, which passes laws to spend. WE vote in those who pass the laws. As soon as WE learn that WE need to either cut spending or raise taxes, then WE will not have to borrow.
I can't argue that and I don't think I've seen a RPBot that would. Spending MUST be cut and that's what my vote for RP represents to me. A vote for limited government and responsible spending.
3. Inflation doesn't occur just because currency circulation increases. If that were the case then we'd be facing drastically increasing inflation. Money can and should grow with the economic growth of the country. The more goods, services, and wealth in the country, the more currency should be circulated. Otherwise you are in a deflationary system.
Inflation occurs for several reasons. That includes growth resulting in wage increases which then floats into the system. It's also caused by the input of foreign goods into the system, which may be increasing in price (importing inflation). There are dozens of other reasons.
The general premise of a Central Bank should be to monitor the amount of currency in relation to services rendered and goods produced. If the money created equals actual output, inflation is a non issue even though the money supply is increased. Unfortunately, with all money we're currently creating we're creating a debt of interest to create it. I don't know what interest is pegged at today, but for the sake of brevity let's just say it's 4 percent. The only way we can generate more money for increased production with the current system is to generate a loan. So, we create $100,000 loan to XYZ corporation for expansion and therefore job creation. That's $100,000 that theoretically becomes an increase of goods/services equivalent to $100,000. Unfortunately, that $100,000 requires interest on top of it so money has to be created to pay the interest as well. So if the loan was 30 years, over the course of those 30 years $71,871 must be created to satisfy the 4 percent interest. So now $100,000 worth of goods/services cost $171,871. With the current system there is no way to control or prevent inflation because your dollar input will never balance out the actual output. You have a giant leech on the system that provides no production in the system yet milks endless amounts of cash back out of it by loaning money it didn't have to loan in the first place. It doesn't matter that the value of the dollar continues to fall to those controlling the fed because the more debt created the more of the wealth they accumulate at the expense of the population. If they loaned out money they actually possessed, then interest would be fair and just. But to charge interest for money they don't have to lend is ridiculous and needs to change.
4. The problem with the Fed is that it has the problem of trying to balance short-term movements with long-term projections using historical events. Anybody who is a quantitative person involved in statistics knows that history is a very imperfect predictor of the future. You are always behind the curve. When inflation finally rears it's ugly head, it's too late and you are trying to play catch-up. AFAIK the only time the Fed was able to head off inflation was the mid 90's when they did pre-emptive rate increases, which turned out to be very accurate. However, those were gut feelings, not exact data driven events.
Furthermore, economics, at it's heart, is still an art, not a science. It is impossible to gauge human psychology when it comes down to these events. Thus, managing the growth of an economy that is unpredictable and un projectionable is more or less an impossible task.
Thus, the movements of the Fed are imperfect. Additionally, they will never be popular because everybody wants growth to be predictable. However, irrational exuberance, irrational pessimism, and the bubble mindset make it impossible to predict exactly how to stimulate or reign in the economy.
Additionally, the very nature of the Fed is to try to be as hands-off as possible without letting the economy run rampant. However, the ability of the economy to go through boom and busts have led to some of the greatest inventions and times of innovation and genius this country has ever seen. This destructive creativism is essential to continuing a modern country.
Blame the Fed all you want for the problems. However, until you come up with a viable and implementable solution, then shut the fuck up. I am sure some dipshit will go on and on about gold. But guess what? Gold is a commodity that is prone to speculation worse than a currency. It's deflationary in nature. It's inflexible, as the 1930's proved since *ALL* countries still o nthe gold standard took, on average, about 5 more years to even begin to recover.
Our currency is backed by something a lot less problematic, the US economy, the US military, and US innovation. It may not be fungible like gold, but is sure as hell gives you a vested interest.
That's a nice lecture and all, but it doesn't get to the root of the issue. The people who control the entity itself have nothing to lose so long as they maintain the slow pace of siphoning everything to the top. They control policy to minimize the potential for large corrections to prevent a total collapse but within the boundaries of ever increasing profits for them, not the US as a whole. There only major issue comes is if the entire system collapses and if I were a betting man I'd say they have enough tangible assets that a total economic collapse still wouldn't impact them. Meanwhile those of us who rely on tangible production to survive will be left in the cold wondering WTF.
That said, I'm not on the whole gold/silver/coconuts bandwagon. Money is make believe whether it's a paper bill or a metal coin. People like gold because it's pretty and shiny and they've all been brought up to believe it has a value. I'm here to tell you, if you're starving in Africa and some weird looking white guy offers you either a loaf of bread or a gold nugget you're going to take the loaf of bread. That gold nugget may be worth 10 loaves of bread but if no one wants the gold nugget instead of their bread you're going to starve. I don't know the answer as to how to make a monetary system that works better, but I do know that rewarding anyone for not being productive isn't it and that's precisely what we have now with banks creating money and charging us all for it. The government should set a fixed amount of dollars/bongo bucks/quadrillas available in the system and adjust it according to actual productivity. When expansion of business is required and money is needed, that business can pay the government back not some private entity.
In conclusion, let me ask people this. If the Fed, with a Fiat currency, were so evil and the root of all inflation, then how was inflation caused in the 1960s and 1970s when the Fed had far less control over rates. It had far less power to put bills into the market. The government had essentially no debt and the amount of currency into circulation. How then, was the Fed able to raise rates and get inflation under control so quickly? I thought the Fed was evil and wanted inflation?
As stated above, they maintained the system from collapse to safeguard themselves, not the US as a whole.
What then, about years prior to that? When inflation was unpredictable, wild, high, low, inflationary, deflationary, and the economy was much more difficult to manage? Was that such a great time then? Additionally, you are talking about 100 years ago when managing an economy 1/200th the size was relatively easy. Now, using the same system, woudl be impossible and would lead to our collapse.
Returning to the past would be no more effective than staying the course with the current system. That doesn't change the fact that the system as it stands could use some serious improvement. Also, if you ever find a way to keep people from being people, please keep it to yourself as there are many governments out there that would be quite interested in acquiring and developing your product.
You people are so f'ing ignorant of the facts of the Fed, it's purpose, economcis, and above all, HISTORY and HUMAN PSYCHOLOGY.
I edited out the "insulting" parts so RPBs don't get their undies in a bunch.
1. The controlling shares? Have you ever looked at the % of float owned by "controlling" entities in the public space? The majority of shares are not owned by private intities, but by funds, institutionally. I seem to recall that, on average, 3/4 of all float is owned by funds, with the remainder being owned by individuals. Considering that, since they are institutional shares, no single person can influence them to a great extent, not even super wealthy. Granted, I have my own problems with how funds vote, but essentially those banks are owned by Americans as a whole. Additionally, any money made or lost, in those investments are made and lost by Americans.
Show me someone any any board associated with the fiscal policies developed by these organizations who has a net worth < say $10,000,000. I'm quite certain you can't and you probably won't bother. Hell, that's quite a few names to comb over. The people who make these decisions have wealth far greater than the average American family and they base their policies on what will make them more money, not the country or it's citizens. You know full well that even someone making $200,000 a year couldn't buy enough shares in even the weakest financial institution to get a seat on a board. And as far as being owned by Americans, it seems to me that both BOA and CitiGroup recently put out calls to Chinese investors.
2. If you look at the last 30 years the "greedy" bankers have done pretty damn well getting inflation under control, eliminating wild movements in inflation and growth, and creating a consistent period of overall healthy growth. One could point out that we have had two large asset bubbles in the last 10 years, which can be attributed more towards the stupidity of the people rather than the fault of the bankers. There wasn't an over-arching movement inside of the banking world to create them, since the prevailing philosphy was one of hands-off economics. The more the Fed causes movements in the economy the more the economy depends on the Fed.
B.S. plain and simple. The current economic problem this country is dealing with is due in large part to manipulation of interest rates by the fed in an attempt to prop up a sagging economy. They pushed things to the point that they were giving out nearly free money so unscrupulous investors took advantage of stupid people as the risk appeared minimal. Now, before it's all said and done, those of us producing actual goods and services in this country will get to pay our hard earned money to bail out all the stupid twits while the top tier financial institutions will come in and buy lower tier financial institutions and funds for pennies on the dollar. Tell me how any of that benefited "We The People?"
How could they not give "two shits" about "joe sixpack"? Joe sixpack is the one that runs this country. People blather on about the wealth accumulated by the top x%, but they neglect to mention that if J6P doesn't do well, that top doesn't do well either, except for the super wealthy (I do support the estate tax BTW).
IMO, the Gini Coefficient pretty well sums this one up. The more time that goes by, the less money there is to go around at the bottom and the more there is at the top. Link If Joe Sixpack was in control and actually driving the economy, wouldn't it be in everyone's best interests that he maintain a certain percentage of the wealth? The top makes more and more of the total wealth and we continue to make less and less. Bear in mind that most homes and businesses in the US are owned by a financial institution in some fashion. If the economy tanked tomorrow and none of us could pay our mortgage, who owns your house?
You say give the power to the government? Hasn't that been tried several times in the last 70 years to disasterous effects? What about the Wiemar Republic? Brazil, Argentina, Venezuela, Russia, Asia, or any other country that has lacked a strong CB has been overrun by corrupt politicians who grab monetary power and retain it through manipulating the populace. You want to entrust one group with everything? Sorry, but I will let a capitalist run the bank system faster and more readily than I will let a politician, who has a greater chance (and faster one) of becoming a dictator with unlimited power.
A perfect example of this is Chavez.
I'd say we're close to the dictator end of that stick now and all we really need is the current economic conditions to free fall. We may just get to see how a central bank can lead to the same eventual outcome. However, this hasn't happened yet so your point stands. For now.
2. The Fed being more transparent is a bad idea for several reasons. First off, the FOMC would not be albe to discuss certain ideas, such as ways to remediate economic problems, future projections, or other issues. The market would react wildly to the events, much the same as investors peaking into the BOD would react wildly to any speculation or discussion into potential movements. It's a horrible idea to allow completely unfettered access to the FOMC. It would remove the free flow of ideas and add significant volatility.
You're repeating your point and not really adding anything to it. I disagree and I guess we'll have to leave it at that. The only thing I might add at this point is market spikes and drops that occur in relation to announcements by the fed. I think these false adjustments could be avoided with a more open economic policy.
3. The Fed should not only increase the flow of new liquidity into the market just based upon general growth. New liquidity must be provided for smaller economic events than general trends, such as banks needing short to long-term liquidity. Additionally, as recent events have shown, liquidity needs to be injected into the market to unfreeze the markets. The asset backed commercial paper (ABCP) market has traditionally been free-flowing, trading at Libor+0 spread, but has undergone seizures in the last 5 months caused by the subprime fiasco. Most ABCP conduits are fine and should treated as such. However, investors, being as skittish as they are, chose not to take any risk at all and completely pulled out of the market. ABCP funds not just mortgages, but everything from credit cards to 30-day trade receivables, which are essential to the functioning of all businesses to some degree or another in the country. It used to be a 1.2TR market, which is down to ~800bn. However, as everything froze rates from from L-Flat, to L+120 in some cases, dramatically effecting the market. The Fed releasing liquidity has been attempting to unfreeze the market, to varied success.
Additionally, adding liquidity and dropping rates (not always the same) stimulates business beyond what people *want* to do for unrational reasons. Thus, it is not a bad thing. To say that cash beyond the growth of GDP, is bad, is to ignore every reason why it is good, which is a bad thing in and of itself.
If you or the fed find a way to accomplish that without making my dollar worth less, I'll reevaluate my position. Injecting cash with no tangible increase in production devalues existing currency plain and simple. Sure, you're trying to "correct" the market but this I feel falls into your earlier statement of short sighted decisions being bad for the long term economy. Once that "injection" occurs, there's no way to take it back without witholding funding necessary for later growth somewhere else.
4. Returning to the past is far worse than retaining the current system. The current system, while not perfect, has been found to be a generally good system. Churchill said that Democracy is the worst system of government, except for every other system that has been tried. A CB is the worst system of monetary management, except for every other system tried.
So, the premise there is that we can't change what we have because it's better than what's been tried to date? I say we give some young financial prodigys a crack at coming up with something better.
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