Your thoughts on the Fed

The united states fed.
All mine are as Jim Cramer states...
THEY KNOW NOTHING!

 

They don't have an easy job that's for sure. One the economy because of credit problems is slowing so they need to lower interest rates on the other hand because of commiditiy prices inflation is being pushed up. To address one problem you need to lower or raise interest rates which increase your other problem.

 

They created the credit problem, and now they can only fight it by playing with credit, which doesn't address the actual problem.

One of the worst years in American history was 1913. We got the 16th Amendment (Tax) and the Federal Reserve. Within 18 years, we had the Great Depression.

 

I think they contributed to the problem but didn't create the problem, because you still have Japan loaning money at near 0% which is adding excess liquidity to the system, you have high saving rates in the east which a desire to invest them money some place and that ends up in the US. The Fed didn’t invent sub prime mortgages and CDO’s.

Also one can make the case that the reason for the Great Depression was the Fed’s inability in inject liquidity into the systems because of rules governing the gold standard.

 

Greenspan created 1% overnight rates, which started fueling the bubble, to replace the Tech stock burst. Even now, they are lowering interest rates to add excess liquidity, to save people from losing their homes. It doesn't address the issue that many of these people should never have been given mortgages, or dipped into their equity to finance their lifestyles.

When the government intervenes, and manipulates the market, it distorts the information that buyers, sellers, lenders and borrowers use to ascertain what is and is not a sound investment. That's the basis of Austrian Econ. Understanding human action, and how market intervention confuses appropriate human action to risk or reward.

Yeah, the market devised sub-prime and CDOs. They also invented interest only. But they were encouraged to do so by easy availability of cheap credit and liquidity. They had so much easy credit, they invented ways to invest it.

And the government proper is not totally without blame either. Freddie Mac and Fannie Mae are way under-capitalized, but guarantee so much in mortgages, with the implicit understanding that the government will bail them out in a crisis. Bailing them out with TAXPAYER money. Knowing that these guaranteed mortgages are a no lose proposition, encourages over investment and the artificial creation of a bull market by lax lending standards.

We've already covered this. The FED created the Roaring 20s, which precipitated the Depression.

I'm tired of sourcing relevant educational literature if people won't read it, but if you are interested in expanding your horizons, try this

http://www.mises.org/store/product1.aspx?Product_ID=63

Until people understand the Austrian theory of the business cycle, we're going to be doomed to this bomb/burst paradigm, instead of a steady pre-FED growth America enjoyed before 1900.

 

Actually, you can read the introduction to the book I linked to above.

http://www.mises.org/article.aspx?Id=447

Bear in mind, the bulk of the 20th century has been dedicated to pro-FED propaganda, and it has only been in the last 25 years that people have begun to assess that period without the dogma and bogus misconceptions about the gold standard.

 

Everytime the fed comes out and talks, no one likes them. They think there helping but the people don't see that ehh
(Unless rate cuts)

 

Rate cuts only help people with credit debt, or who use credit financing.

It hurts real people with real savings because they get a lower return on their money.

The truly tragic thing, is that artificially low interest rates confuses the market, and leads to people making a lot of speculative decisions (see housing boom, roaring 20s, .com boom, and numerous foreign examples).

Low rate, fast and easy credit benefits the people who get it first. Once that additional credit is in the system and prices adjust, there is no benefit to everyone else.

I mean, it's common sense that if there are 300 million Americans, and $900 million dollars in circulation, and the government produces an additional $300 million in new currency, the only way to equitably distribute it is for every citizen to get $1 dollar.

So while they have increased the money supply, they haven't actually made anyone richer. They have merely devalued the money already in circulation. Your share of the aggregate wealth is the same, but it is now represented by $4 instead of $3.

Which would make the whole process of introducing more money futile if it was evenly distributed.

That is why, when the government introduces more money or credit into the system, it is important to ask, "Who is getting the money first, before it circulates to everyone?"

Because the people who get it first, can spend it before pricing adjusts for more currency in the flow. If I get the first new $1, I can run out to Walmart and buy something with it, before the pricing adjusts to $1.33. Someone who gets the last dollar is much more like to pay $1.33 than $1.

As in every kind of investigation or analysis, it's always wise to "Follow the money". Paraphrasing Milton Friedman, "Ben Bernanke (FED Chairman) doesn't fly over the country in a helicopter, dropping money down to the citizens".

It has a specific point of entry, and access to that influx is not equal for everyone.

 

They are destroying our economy. Ever since they took our money off the gold standard, inflation has been skyhigh.



Notes:
-Federal Reserve inception 1913.
-USA went off the gold standard in 1933
-Notice how the peaks in inflation over the last 200 years have coincided with major wars.

 

You'll notice that the other major peak occurred during the Civil War era (1865-ish).

All wars are fought with inflation. Countries would bankrupt themselves if they fought it any other way, and the people would revolt.

Of course, during war, profiteers make a handsome profit, which is likely why the banks frequently fund both sides of a war, as long as the game is on, business is good.

What's interesting looking at the graph, is how it shows productive gains over time, the same productive gains the layman thinks results in in higher prices today.

The cumulative CPI in 1890-1900 was lower than 1800-1810. We were actually able to realize our productive ability and capacity to become more efficient. True deflation in prices because of efficiency gains.

A theory I have, is that we long ago passed the threshold of feeding, sheltering and clothing everyone in the world. The destructive wars, and siphoning off of the "people's" productivity through the banking system has kept us somewhat "dumbed down".

 

The Federal Reserve System is a horrible system. It attempts to do the impossible: to predict the market. Greenspan's assumption was that the market would make productive investments, not unnecessary consumption. He was wrong; the American market consumed more than it could. That said, can we blame Greenspan for underestimating the stupidity of Americans? If given the opportunity, we will buy goods that we can't afford. I think that Americans should be better educated financially. I cannot stress this point enough.

Now let me shift my focus directly to the OP. Do you understand how the system you're criticizing works? Ignorance is at its finest when a claim is based solely on speculation and not evidence.

In closing, if I may make an allusion to Winston Churchill's quote: the Federal Reserve is the worst form of banking system except all the others that have been tried.

 

Follow the money. I'm tired of the "market being a failure" or the "consumer being irresponsible" for a monetary system that this country was PURPOSELY founded on to avoid.

Nonsense. I wish you would stick around to have this debate. I doubt we could even agree on what a dollar is, and why that is important.

 

The Federal Reserve System is a central banking system, not a monetary system. The fiat currency system is a monetary system.
Would you say that market failures don't occur? Would you say that an average American is well educated financially?

So what's the best system that we've had?

 

I wasn't talking about the FED. The FED is an enabler for a Fiat Currency. It's also a key plank in the Communist Manifesto.

http://www.anu.edu.au/polsci/marx/classics/manifesto.html

Market failures do occur. It's a natural part of the business cycle. What is unnatural is subsidizing failure, at a cost to the consumer, perpetuating bad business, and building booms and busts.

The average American is not well educated financially. You can thank public education and media consolidation for that.

People were much smarter with their money in the past, with lesser indoctrination.

Barter was good. Hard money was better. Colonial Scrip worked fairly well.

I don't know what the monetary system was called in 1777, but that was far superior to what we have today.

You can't have bankers printing your money. Historically this has been disastrous. And you can't have a fiat currency without inflation, which erodes the wealth of the people.

There is a reason why the (sic) gold standard and Bretton Woods failed. The government used it to back fiat currency, and when they couldn't control the printing presses, had to get us off of a metal system.

This is a general statement,
If you don't know what money is, and you don't know how capital is created, or the value of savings, or how free markets work, then you can't possibly hope to construct a better system.

 

Care to explain?

People who are financially educated can avoid making poor financial decisions. Purchasing goods that you can't afford is a poor financial decision.

Here's a fact of life: we have a fractional reserve banking system. It's what we've had before that Fed was created. It is a financial system that the gold standard gave birth to. It wasn't designed by anyone; it's a product of evolution. It allows the private banks to be in control of the money supply. Its nature is to cause booms and busts. It will not go away just because we back our money with something. It is here to stay unless we make it illegal. That's what fractional banking is. Now, it seems to me that it's a good idea to have an independent organization to control this financial system. No, the Fed not perfect, but it's better than nothing (and certainly better than barter).
I like Milton Friedman's idea of having a mechanical system, but you'd of course be against that as well. What system are you promoting exactly? How do you stop private banks from practicing fractional reserve banking?

 

I agree with most of what has been said. My own feelings are:

The Feds are just politically appointed hacks, and Greenspan is one of the all time worst of the bunch.

Thanks to people like chaps like Cramer, who: 1) continually encourage Americans to spend what they do not have, 2) borrow themselves deeper, and deeper in debt to the point that we are in the process of defaulting on hundreds of billions of dollars, 3) gamble on things they know nothing about (stocks and the stock market), 4) feed their hard earn money to very tiny minority of ultra rich (1% of the population owns 40% of the countries assets), who employ him ....

We, as a country, are in the worse economic shape that we have been in memory!

The last thing any of us need to do, is listen to the hacks on CNBC (Kudlow) for example) or elsewhere whose job is quite simply to move money from everyone's pocket into the pocket of his rich friends. First the Internet bust, then the housing bust (because the Feds allowed overbuilding which depreciated everyone's home), and now .,....

 

I thought I made it clear. The Central Bank enables a fiat currency. There is no other purpose for it. The Treasury can (and should) accomplish the same purpose, because the universality of money in a society should be the following goals,

Portability
Authenticity
Durability
Suitability (accepted as payment of taxes, tariffs, fees and debts)

I assume you consider yourself educated.

Scenario. You earn more than you spend. You save your excess productivity. But inflation erodes the value of your deferred consumption. How do you retain the value of your deferred consumption, without engaging in risk with those savings?

And considering moral hazard, how do you explain the situation where your deferred income that would buy a McDonald's cheeseburger today, not be able to buy the same McDonald's cheeseburger 5 years from now? Surely the Cheeseburger did not get more valuable?

I'm not interested in "facts of life" or "better than nothing" arguments. They lack substance. Piss is better than nothing to drink. Facts of life is a phrase used to limit discussion.

Federal Reserve notes are already illegal. The Constitution clearly defines a dollar as a measurement of currency, and the 1792 Coinage Act defines a dollar as a Spanish Milled Silver Dollar (371-1/4 grains of silver). All of the "dollars" in your wallet are Federal Reserve Notes, not real American dollars, unless you own silver coinage. Article 1 section 9, "only gold and silver can be legal tender in the payment of debts" (paraphrased).

So I would hesitate to say that the monetary system was not designed. It was designed just as precisely as the structure of government into 3 branches.

The First National Bank, and the Second National Bank and all Alexander Hamilton inspired Central Banks right up to the FED have not come as a result of evolution, nor was the end of the early Central Banks. It was all done by law, and with a specific intent in mind. There is a reason that the Anti-Federalists fought so hard to make sure that only Congress had the right to coin money, and not the private banks. These people had lived through periods of inflationary Fiat currency, and the destructive state power it enables.

Barter is a system of commerce, and has nothing to do with the FED. All commerce in one sense or another is barter, but under a money standard, we don't have to trade your oranges for my apples, so I can trade for bananas and use those bananas to trade for sugar. We can exchange a common good, which is universally excepted, and remove numerous needless transactions to barter for the final product we wish to acquire.

Again, independent is one thing, and should be avoided at all costs. How can the most important function of government, measuring and maintaining the wealth of the nation be outsourced?

The FED is not independent. It's a collaboration of government and private banking interests. The Constitution clearly states, that only Congress can coin money. The reason being, under the articles of confederation, the states produced their own money, and created fiat systems that were not harmonized (leading to imbalances in trade). This is why bankers were not allowed to coin their own money, but now under the FED, they pretty much can. Congress has little influence or even information on what the FED is planning to do, and why.

Friedman was a dreamer. Brilliant but misguided. He was one of those guys that fit the saying of, "that works great in practice, but how would it work theoretically?"

There is nothing wrong with full reserve banking. I have yet to hear a solid argument against it.

Banks leverage fractional reserve banking to be the first to profit from all new credit in the system. They get to introduce it before prices adjust, and reap an interest revenue before anyone has had the ability to spend the new credit.

One this creates moral hazard, and two, how is fractional reserve banking any different than the act of counterfeiting, except it is not illegal under law? Isn't it counterfeiting?

 

If I had more than I spend, I would have most of my money invested in various securities and other vehicles. Beating inflation is easier than taking candy from a baby.

Ever heard of inflation?

Of course our monetary system was designed. Fractional reserve banking is not a monetary system; it is a financial system. Fiat currency is a monetary system. Gold standard is a monetary system. Do you understand the difference? Fractional reserve banking existed before fiat money entered the picture.

Again, do you understand the difference between fractional reserve banking, fiat money, and the Federal Reserve, or are you setting up a straw man on purpose?

If it involves a medium of exchange, it's not barter. If you're exchanging a common good, that serves as a medium of exchange.

Why would anyone in their right mind want monetary policy to be controlled by the same people who control fiscal policy? It is important for monetary policy to be independent of politics.

You are wrong on so many things here...
Congress has the power to delegate the authority to create money to another party. Perhaps you should take a closer look at what the constitution says and stop taking things out of context. Article I, Section 8, Clause 18 of the United States Constitution states:

To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.

Private banks created money before the Fed. I don't know how many times I have to repeat myself.

I really get the feeling that you're not understanding how fractional reserve banking works. Fractional reserve banking is a way for the banking system as a whole to create new lending capacity. I hope you are familiar with basic accounting. Here's what the simplified balance sheets of banks look like through the process of loaning money:

Example: Initial Deposit of $100 with 20% RRR.

Bank A
Assets
Required Reserves: $20
Excess Reserves: $80
Total: $100
Liabilities
Initial Deposit: $100
Total: $100

The excess reserve of $80 gets loaned out to guerilla:

Bank A
Assets
Required Reserves: $36
Excess Reserves: $64
Loans: $80
Total: $180
Liabilities
Initial Deposit: $100
Guerilla's account: $80
Total: $180

The money supply has increased by $80. You spend this $80 to buy goods from me. I deposit this money in my own bank:


Bank A
Assets
Required Reserves: $20
Excess Reserves: $0
Total: $100
Liabilities
Initial Deposit: $100
Guerilla's account: $0
Total: $100


Bank B
Assets
Required Reserves: $16
Excess Reserves: $64
Total: $80
Liabilities
RTG's Account: $80
Total: $80

Bank B loans out the excess reserves of $64 and the process continues. If it continues indefinitely, $400 (Money multiplier 1/.2 multiplied by the excess reserves $80) of new lending capacity can be potentially created by the banking system. Once loans are paid back, money is destroyed. I don't see how this is counterfeiting. If you ran a bank and I deposited $100, why shouldn't you be able to loan out a fraction of that and collect interest on it?

 

What goes up must come down.