Posted on 01/17/2023 10:23:25 AM PST by SeekAndFind
Those who know Wall Street lore sometimes recall that Fed chairman William Miller—Paul Volcker’s immediate predecessor—joked that most Americans believed the Federal Reserve was either an Indian reservation, a wildlife preserve, or a brand of whiskey. The Fed, of course, is none of those things, but there’s also one other thing the Federal Reserve is not: an actual bank. It is simply a government agency that does bank-like things.
It’s easy to see why many people might think it is a bank. “Bank” is right there in the name of the twelve regional banks that make up the system: for example, the Federal Reserve Bank of Kansas City. The Fed also enjoys many titles that make it sound like a bank. It’s sometimes called the “lender of last resort.” Or it is sometimes called “a banker’s bank.” Moreover, many people often call the Fed “the central bank.” That phrase is useful enough, but not quite true.
Moreover, even critics of the bank often repeat the myth that the Federal Reserve is “a private bank,” as if that were the main problem with the Federal Reserve. And then there are the economists who like to spread fairy tales about how the Fed is “independent” from the political system and makes decisions based primarily on economic theory as interpreted by wise economists.
The de facto reality of the Federal Reserve is that it is a government agency, run by government technocrats, that enjoys the benefits of being subject to very little oversight from Congress. It is no more “private” than the Environmental Protection Agency, and it is no more a “bank” than the US Department of the Treasury.
In its early decades, Congress and the Fed went to some pains to make the Fed look like a private organization that was self-funding, economically solvent, and subject to market forces.
For example, the Federal Reserve System was created—at least on paper—as a very decentralized organization. To this day, it has “shareholders,” which are the private “member” banks of the Federal Reserve. In the early years, the Federal Reserve System’s district banks operated fairly independently. Moreover, these shareholders were (and legally still are) supposed to incur losses when the Federal Reserve is in the red. Back in the days of the gold exchange standard, the Fed had gold reserves and its “banknotes” were supposed to be truly tied to those reserves in the banks. The Fed banks made revenue from discounting bills of exchange and from charging interest on government bonds. These relatively simple organizations were supposed to loan reserve funds to ensure banks had enough liquidity to remain solvent and help deal with financial crises.
The idea of ensuring Fed banks had real capital reserves made some sense when there was a domestic gold standard. But that all changed in a big way with the Great Depression. When Franklin Roosevelt ended the gold standard, the Federal Reserve Banks were forced to hand their gold over to the US Treasury. (To this day, the Fed has no gold.) Then came an enormous expansion of the regulatory state’s role in financial matters, and the Fed became a big part of this. Today, the Fed is far more a regulatory agency than it is any sort of “bank.”
Then, during the Second World War, the mask completely came off the ruse that the Federal Reserve was something other than a way to essentially launder government debt. As the federal government issued enormous amounts of new debt to finance the war, the federal government exhausted the market demand for government bonds at the interest rates the government was able to pay on its debt. So, the Federal Reserve stepped in to buy up large amounts of debt, which kept down interest rates. Fed chairman Henry Morgenthau “simply decreed that interest rates on the federal debt would be ‘pegged’ at low levels.” This pegging required the Fed to buy up a lot of government bonds. But, of course, by then, the Fed had no gold and no reserves in any meaningful sense. It simply created money to buy up those bonds—thus “monetizing” the debt. There was no economic theory or savvy commonsense “banking logic” at work. This was simply an organization doing what it was told: financing a war for politicians. Moreover, with the dollar no longer tied to gold—especially after the closing of the gold window in 1971—the Fed could create money largely at will.
All of this became progressively normalized in the decades after the war. But it all took an additional great leap away from market-based sanity after the financial crisis of 2008. Since then, the Federal Reserve has routinely bought up both government debt and mortgage securities as a means of both propping up asset values for politically connected banks and enabling ever-larger amounts of deficit spending by the federal government. For example, when federal politicians in 2020 and 2021 wanted to spend trillions of dollars to pay people to not work during the covid lockdowns, the Federal Reserve was there yet again to make it possible the federal government to issue trillions of dollars in new debt without pushing interest rates up. The Fed did this by adding more than $3 trillion in government bonds to its portfolio. This monetized the new debt in a similar way to what had been done during the Second World War.
Through it all, the Fed has just been there to assist the US regime in implementing a variety of policies.
In spite of its record, the Fed continues to keep up the fiction that it is some kind of private organization with a real balance sheet, real assets, and real liabilities. But the Fed also doesn’t adhere to any of the accounting standards that a real bank would employ. As Paul Kupiec and Alex Pollock put it, “Unlike other financial institutions that must comply with GAAP [Generally Accepted Accounting Principles] accounting standards, the Federal Reserve Board decides on the accounting standards it uses to report the Federal Reserve System’s income and balance sheet positions.”
This reality has become important in the past year because, for the first time in a century, the Federal Reserve is losing money. Kupiec and Pollock note, “If the Fed was a bank or other regulated financial institution, it would be closed because it is already deeply economically insolvent.” Yet “‘Innovations’ in accounting policies adopted by the Federal Reserve Board in 2011 suggest that the Board intends to ignore the law” and carry on as if there were nothing wrong. It can do this, of course, because the post-gold-standard Fed can create money at will. These “innovations” are described in detail by Robert Murphy, who noted back in 2011 that the Fed had deliberately changed the way it does its accounting to ensure that bankruptcy is a legal impossibility.
The fake accounting didn’t matter much in 2011, when the Fed was still essentially solvent. But in 2022, honest accounting showed that the Fed was insolvent. How did this happen? It’s a result of the fact that the Fed now has a very similar problem to what the savings and loans had in the late 1980s and early 1990s.
But whatever its cause, the Fed’s current bankruptcy is simply the latest example of how the Fed is in no way a real bank or a private organization that funds itself through prudent self-management in the marketplace. Even worse, the Fed funds itself while in bankruptcy by printing money and inflating away the value of the dollars held by ordinary people. The Fed is just another tax-funded government agency, except that the tax that funds the Fed is the “inflation” tax, in which the Fed steals pieces of wealth from savers and workers as it devalues the dollar for the Fed’s own benefit. Or, as Kupiec and Pollock note, the Fed can “monetize Federal Reserve losses, thereby transferring them indirectly through inflation to anyone holding Federal Reserve notes, dollar denominated cash balances and fixed-rate assets.”
The Fed: it’s not private, it’s not financially sound, it’s not a bank. It’s just another government technocracy that’s ripping us off.
Funny how the Robber Barrons disappeared right when the Fed was created.
Its not Federal
And there are no reserves.
It’s a private corporation counterfeiting a nation’s currency and a blatantly unconstitutional long con job imho.
I have nothing against banks, not even central banks, but not private owned ones printing species at interest.
That is the definition of a bottomless pit.
Remember in 1913 their pitch was
“ to prevent booms and busts” ,,,
then it proceeded to produce the biggest boom roaring 20’s style
followed by this nation’s largest depression.
.Kennedy introduced the silverbacked Treasury notes as good interest free currency to drive the suicidal interest accumulating federal reserve notes out of the market
And we know what happened next.
.jmo.
When you hear all these crazy calls for reparations coming from San Franciso and California, just thing what would happen if a person was named to the Chairman of the Federal Reserve had the same economic views of Elizabeth Warren and Bernie Sanders and implemented a social justice agenda.
You pay interest on your FRNs? Or you collect it?
The world has known for 350 years that centrally-issued, fiat currency ALWAYS leads to economic destruction, massive inequality, and more power to government and corrupt cronies. America's Founding Fathers understood this as an unalterable truth
The great trick of progressives in the last 100 years is convincing us this was NOT true. That central planning was indeed possible.
This thread is guaranteed to be entertaining. I already noticed this gem from the article:
“This reality has become important in the past year because, for the first time in a century, the Federal Reserve is losing money.”
This Ryan McMaken really knows his subject... or not.
I believe Judy Shelton kicked around the idea of gold backed 5 year Treasury bonds. Naturally it was a bipartisan rejection of her nomination to the Fed. Still glad she was nominated, smoked out more GOP frauds, i.e. Kennedy in Louisiana.
Griping about FED works. Just like griping about the weather works.
Lol, indeed. The one good thing that can be said about the current Fed is that Powell recently resisted calls from leftist pressure groups to add a climate element to the Fed’s purview. This is an exceedingly rare instance of a powerful person/institution refusing more power. With little else these days, something to be pleasantly surprised by.
This is the key line:
“Fed steals pieces of wealth from savers and workers as it devalues the dollar for the Fed’s own benefit”
The question is how long can it continue? Seniors in particular are bearing the brunt of it.
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Actually it devalues the dollar so that the government can spend whatever it deems necessary to spend. Fed chairmen never say “no” to the Federal government anymore. At least Volker (in his day) sent a signal that he would not rubber stamp Washington’s spending habits (at least in the short term) and that the money supply would be tightened up.
Nowadays it’s just buy up all the excess debt that the Treasury dept. wants to issue.
“Kennedy introduced the silverbacked Treasury notes as good interest free currency to drive the suicidal interest accumulating federal reserve notes out of the market”
That’s basically the exact opposite of what Kennedy actually did.
His ideas on silver were spelled out in his January 22, 1962 “Message to the Congress Presenting the President’s First Economic Report”:
“A revision of silver policy. Silver—a sick metal in the 1930’s—is today an important raw material for which industrial demand is expanding steadily. It is uneconomic for the U.S. Government to lock up large quantities of useful silver in the sterile form of currency reserves. Neither is any constructive purpose served by requiring that the Treasury maintain a floor under the price of silver. Silver should eventually be demonetized, except for its use in coins.
(1) As a first step in freeing silver from government control, the Secretary of the Treasury at my direction suspended sales of silver on November 29. This order amounted to the withdrawal of a price ceiling on silver which had been maintained by Treasury sales at a fixed price.
(2) The next step should be the withdrawal of the Treasury’s price floor under domestically produced silver. Accordingly, I recommend repeal of the Acts relating to silver of June 19, 1934, July 6, 1939, and July 31, 1946; this step will free the Treasury from any future obligation to support the price of silver.
(3) I also recommend the repeal of the special 50 percent tax on transfers of interest in silver; this step will foster orderly price movements by encouraging the development of a futures market in silver.
(4) Finally, I recommend that the Federal Reserve System be authorized to issue Federal Reserve notes in denominations of $1; this will make possible the gradual withdrawal from circulation of $1 and $2 silver certificates, and the use of the silver thus released for coinage purposes.
The Fed gains no benefit from devaluing the dollar.
The Federal government arguably does because like all debtors they get to pay off what they owe in cheaper dollars.
The main culprit damaging the dollar is probably Congress with their never ending increases in the debt ceiling.
The broadest measure of the US money supply includes Treasury debt. Increases in Treasury debt end up getting monetized which increases the number of dollars in circulation.
It’s odd how I never hear a solution in any of these articles.
The article is from the Mises Institute. Ludwig Von Mises favored closing central banks.
America was screwed big time and the federal reserve has been keeping it going because so many citizens have just TRUSTED the government.....
Well we've seen in the last 6 years or more where that's going!! imhop
You can also listen to G. Edward Griffin talk about it on youtube. https://www.youtube.com/watch?v=lu_VqX6J93k
I’ll check that out. I have the first edition of the text. He’s updated it since the 2008 crash. It should be required reading for high school seniors.
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