The Observation Deck

For the record, the Treasury actually physically prints the money. The Treasury is a department of the United States government. So yes, the government does print the money.

The Treasury prints “currency.” My understanding is that almost all new “money” emanates from the Fed, electronically, and in the good old days it ended up with the banks, who then loaned it out. These days a lot of new Fed money is used to purchase Treasury securities to finance the deficit (so called Quantitative Easing). The Fed has also created a lot of new money to purchase impaired mortgage securities which end up on the Fed balance sheet, which by the way is completely contrary to the mandate that the Fed only purchase securities backed by the full faith of the U.S. government. Plus, didn’t the Supreme Court just rule that the Fed (finally) has to publicly disclose the banks that received TARP money?

Jim, the Fed is NOT owned by banks. I have no idea where you got that from. The Fed is an independent institution, but it is NOT owned by private banks.

My understanding is that “The Fed” oversees 12 Federal Reserve Banks that are in fact privately owned by commercial bank shareholders in their particular region, with the majority of FRB directors supplied by those banks. In fact I believe that the courts have consistently ruled that the Fed itself is also a private financial institution and should be regarded as such. But it has been 35 years since I took economics, these days what I think I know I just read…..

In fact, in normal circumstances (which was not the most recent crisis), private investment banks have no access to the funds given by the Fed. The only banks that by the mandate of the Fed have access to the lender of last resort are those that accept commercial deposits.

This is correct technically, but no longer in reality. When Glass-Steagall was repealed (under Clinton), the firewall between investment banking and commercial banking could then be breached, and most of the investment banks either bought or started commercial banking operations. For instance, “JP Morgan Chase.” Goldman Sachs and American Express were the last big holdouts; they changed their charters in order to be able to receive TARP funds. Remember too that AIG was a big recipient of TARP funds, and AIG is not an investment bank. Most of the AIG bailout money wound up with the financial institutions whose mortgages AIG had insured (i.e. the big investment banks). This tends to be overlooked when the banks claim they have repaid their TARP loans. The repeal of Glass-Steagall has been blamed for the introduction of the “moral hazard” that contributed to our recent financial crisis. Practically speaking, these days virtually all financial institutions have access to Fed capital because they now all have commercial banking operations.

Those people who believe that the US failing is in the cards are, like I said, chicken littles, who want to fear monger and make people listen to their bad economics. Ask any rational economist, because they will say that the US is in no danger of economically collapsing and is in fact recovering.

It’s hard to debate this because we’re talking about the future. I hope you’re right. But certainly we are now finding ourselves in a very precarious position. We are unable to pay back our national debt, in fact it grows at the fastest rate in history. And we cannot possibly keep the entitlement promises we have made and which have no funds “in trust” to back them. This is not emotion, this is mathematics. Couple that with a substantial possibility of rising interest rates that would completely overwhelm our ability to service our debt and keep entitlement promises. Japan’s debt situation looks worse than ours on paper, but remember that the Japanese national debt is owned primarily by the Japanese. They are tolerant of artificially low interest rates on their sovereign debt. Our debt is owned by China, Japan, etc. and who knows how long they will continue to tolerate the artificially low rates we saddle them with.

I guess the Dallas Federal Reserve Bank President must not be a rational economist. He just came out and said that without “painful” measures the U.S. is clearly facing insolvency (click here).

We were in a much much worse situation in the Great Depression and recovered.

In many ways we are in a much worse situation now than we were at the onset of the Great Depression. Back in 1929 there was no gigantic national debt and there were no enormous entitlement promises. Virtually all of the oil was still in the ground. We had a bustling manufacturing economy. Our infrastructure wasn’t crumbling. There were countless family farms that could help keep people busy and fed. We weren’t financing two (now three?) wars. There weren’t all those CDOs and other derivatives floating around out there with all that interconnected counterparty risk. The population was a fraction of what it is today. There was no Fannie and Freddie. There were no credit cards and HELOCs and folks maxed out on them. First mortgages required down payments and were for five years. We weren’t vulnerable to losing reserve currency status of our dollar. Our work ethic was superior back then. Money was backed by gold and silver, heck it was MADE of gold and silver, not paper and linen.

Thealexa I am not an economist and I don’t have all the answers. But I do think that our financial system has become exceedingly complex and that we have serious issues that we will either face or will bite back with a vengeance. If that makes me a chicken little then so be it.

Tim Liston wrote:My understanding is that “The Fed” oversees 12 Federal Reserve Banks that are in fact privately owned by commercial bank shareholders in their particular region, with the majority of FRB directors supplied by those banks. In fact I believe that the courts have consistently ruled that the Fed itself is also a private financial institution and should be regarded as such. But it has been 35 years since I took economics, these days what I think I know I just read…..

Well let's get the answer right from the source to help clear things up:
http://www.federalreserve.gov/generalin ... qfrs.htm#5

The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent within the government."

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

Bryan you don’t really believe this do you? I sure would not take at face value anything that the Fed says about itself.

However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute.

Bryan, the Fed has steadfastly resisted any attempt at Congressional oversight. Please don’t make me find sources for this. Just type “audit the fed” into google and start to review the 20,500,000 entries that pop up.

This one seems representative: Bernanke: “Auditing Fed would violate ‘bedrock principle of central banking’

Federal Reserve chair Ben Bernanke is firmly resisting the initiative in Congress to subject the nation's bank to a public audit.

We’re not allowed to know who receives funds from the discount window. We’re not allowed to know who received TARP funds. We’re not allowed to know what securities the Fed owns. According to Bernanke, that would violate a “fundamental bedrock principal of central banking” which as near as I can tell must be complete opacity and unaccountability.

We’re not allowed to know for certain sure that the Fed has consistently violated its mandate to purchase only securities that are backed by the full faith of the U.S. government, which is black-letter law.

We do know that a lot of people bounce between gigs with the Fed and with large banks.

Geez Bryan, did you read that claptrap before you posted it?

PS I’d sure like to be one of those banks getting 6% dividends from FRBs that are “not operated for profit.” Man I didn’t even know that. Now I’m really pissed!

Tim Liston wrote:Bryan you don’t really believe this do you? I sure would not take at face value anything that the Fed says about itself.

How is that any less valid than believing in crazy conspiracy theories about the Fed that don't have any real factual backing?

I'm more than open to looking at any other factual descriptions you can find on Fed ownership structure if you can find something that contradicts what the Fed describes on its own website.

However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute.

Bryan, the Fed has steadfastly resisted any attempt at Congressional oversight. Please don’t make me find sources for this. Just type “audit the fed” into google and start to review the 20,500,000 entries that pop up.

That doesn't make the Fed statement false, they are regulated and receive oversight from Congress. They may resist change, but so do most agencies and industries under Congressional statute. If you want to blame anyone, blame the Congressmen for being weak.

Crazy conspiracy: the Fed is controlled by congress:

Ben Bernanke: “My concern about the legislation is that if the GAO is auditing not only the operational aspects of the programs and the details of the programs but making judgments about our policy decisions would effectively be a takeover of policy by the Congress and a repudiation of the Federal Reserve would be highly destructive to the stability of the financial system, the dollar and our national economic situation.”

In layman terms: We operate in the dark and that's the way it will stay unless you want us to crash what's left of the economy.

Tim Liston wrote:In many ways we are in a much worse situation now than we were at the onset of the Great Depression. Back in 1929 there was no gigantic national debt and there were no enormous entitlement promises. Virtually all of the oil was still in the ground. We had a bustling manufacturing economy. Our infrastructure wasn’t crumbling. There were countless family farms that could help keep people busy and fed. We weren’t financing two (now three?) wars. There weren’t all those CDOs and other derivatives floating around out there with all that interconnected counterparty risk. The population was a fraction of what it is today. There was no Fannie and Freddie. There were no credit cards and HELOCs and folks maxed out on them. First mortgages required down payments and were for five years. We weren’t vulnerable to losing reserve currency status of our dollar. Our work ethic was superior back then. Money was backed by gold and silver, heck it was MADE of gold and silver, not paper and linen.

Tim

The real problem is in those days, "the Great Depression" we had manufacturing to help
pull us out of it. Today we have nothing. And even in the stuff we have, it is nearly
immediately taken overseas where people can pay third world prices for quality
programming, and many other services and goods.

The country is broke, we allowed the top 5% to sell us on a "Global Economy" because
they assured us we would be players. Government bought into this hook line and sinker,
never stopping to look down the road. Their vision was terrible(to get back on topic).
Without manufacturing, and with third world countries in the mix, how does America
compete. It simply does not. Now we dumb down the population through cuts in education
and cost of college going through the roof and you once again see another perfect storm
for monumental failure.

In the past 5 years I have come up with two products to be made. One is in technology,
one is in manufacturing. Both to this day receive offers for help in making them, but the
only way it works is either with Indian Programmers, or make it in China. When I push
I want it done here, investors walk away. The difference in price in one is worth noting,
in the other we are talking the savings of pennies, "but multiplied over millions of pieces..."

As for the Fed, I do not believe they are really be held accountable by anyone.

FWIW

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Steve Hoffert wrote:Crazy conspiracy: the Fed is controlled by congress:

Ben Bernanke: “My concern about the legislation is that if the GAO is auditing not only the operational aspects of the programs and the details of the programs but making judgments about our policy decisions would effectively be a takeover of policy by the Congress and a repudiation of the Federal Reserve would be highly destructive to the stability of the financial system, the dollar and our national economic situation.”

In layman terms: We operate in the dark and that's the way it will stay unless you want us to crash what's left of the economy.

But again, that doesn't prove that Congress doesn't have oversight of the Fed, it just proves Congress is not doing its job which no one should be surprised at that part.

This is just a classic case of "don't hate the player, hate the game" . In this case the Fed is player, the game is whether Congress will do its job.

OK, half of this conversation about the Federal Reserve is either crazy or just wrong.

Now, I know that not everyone is well read when it comes to talking about the Fed, so let me clear some things up.

Mr. Schwegeler had a good post earlier about what the Fed is. Please read that, or go to their official website.

The Fed IS NOT OWNED BY PRIVATE BANKS.

It is also not owned by the Federal Government.

Nor is it controlled by Congress. It is an independent government agency that controls monetary policy and the money supply (to that end what I said earlier about the Treasury printing money is NOT wrong, they do, but the Fed controls monetary policy).

Congress SHOULD NOT controll the Fed at all. There is a reason that it is an independant agency. For those of you who like conspiracies I am surprised this has not occured to you. What would happen if the Federal Government controlled both monetary and fiscal policy? Do you see the implications of that? All the chances for corruption and abuse?

Monetary policy has to do with interest rates and inflation. Fiscal policy has to do with government spending and taxes. They can offset each other, but if the government controlled them both, there are SO many chances for politicans to manipulate the economy for their own purposes. That would be a disaster. This is why in most developed economies it is considered a sign of stability to have a Central Bank or monetary policy making institution a little removed from the executive and/or legislative body.

Also, on that note, only banks with a commercial banking branch have access to the Fed in a normal situation. It is true, Glass-Steagall's repeal undid this and allowed commercial and investment banks to exist in the same company. That WAS NOT because of the Fed. That was Congress. Blame them if you don't like the loopholes for the bailout because the Fed has to honor that. However, due to the extreme nature of the crisis, the Fed exercised its legal powers of monetary policy to allieviate what some data suggests might have been a worse economic crisis than the Great Depression had it not been maintained to an extent.

I suggest those of you interested should read more about the causes of the Great Depression and you will see that it was the Fed's inaction and relieving the pressure on banks that made the crisis worse. And I don't think that manufacturing is what got us out of the Depression, it was WWII, but that is up for debate. However, I can guarantee you that the crisis now could have been much much worse if it were not for Bernanke, who happens to be one of the foremost scholars of the Fed and Great Depression. He did exactly what the Fed SHOULD HAVE done in 1929 and learned from their mistakes.

If you don't believe me about the difference in the Fed responses, go read some Bernanke and Friedman, because outlining what they said would take too long. The interesting thing is that Friedman is conservative and Bernanke is moderate or slightly liberal, so both sides of the political divide should be happy, since they say very similar things. But please, don't just go by what people on TV or in opinion columns say. And don't listen to politicians either. 99% of those people wouldn't know the difference between contractionary and expansionary monetary policy if it hit them in the face. And seeing how there are people who still think the Fed is a private bank...

At any rate, the recovery will take less time when Congress decides to make some structural changes to the tax code, health care, and social security. Doing that will have a bigger effect than anything else. Of course, lowering the unemployment rate would help, too.

Thealexa Becker wrote:Nor is it controlled by Congress. It is an independent government agency that controls monetary policy and the money supply (to that end what I said earlier about the Treasury printing money is NOT wrong, they do, but the Fed controls monetary policy).

Congress SHOULD NOT controll the Fed at all.

Whether Congress should or should not actively control the Fed is questionable.

However, what is not up for debate is the fact that the Fed is overseen by Congress and Congress can control the Fed via statute. Even the Fed's website states as much. The Congress created the Fed via statute, it can modify or even close the Fed via statute.

Bryan Schwegler wrote:Whether Congress should or should not actively control the Fed is questionable.

However, what is not up for debate is the fact that the Fed is overseen by Congress and Congress can control the Fed via statute. Even the Fed's website states as much. The Congress created the Fed via statute, it can modify or even close the Fed via statute.

Yes, this it is true that Congress can manage by statues, but they cannot control the day to day actions and responses of the Fed to an immediate situation, which is what is important. If you read what I wrote before you don't want them to be able to do that:

Thealexa Becker wrote:Congress SHOULD NOT controll the Fed at all. There is a reason that it is an independant agency. For those of you who like conspiracies I am surprised this has not occured to you. What would happen if the Federal Government controlled both monetary and fiscal policy? Do you see the implications of that? All the chances for corruption and abuse?

Monetary policy has to do with interest rates and inflation. Fiscal policy has to do with government spending and taxes. They can offset each other, but if the government controlled them both, there are SO many chances for politicans to manipulate the economy for their own purposes. That would be a disaster. This is why in most developed economies it is considered a sign of stability to have a Central Bank or monetary policy making institution a little removed from the executive and/or legislative body.

How can you argue that Congress should control monetary policy?

Think about it.

We have a budget crisis now, they can control fiscal policy. But if they control monetary policy as well...the implications alone send shivers down my spine. Our Congress stinks at managing its own operating budget and you want to give them control over the money supply for the economy.

I don't know about you, but that sounds like a terrible idea. Not to mention the fact that it is better to keep your monetary policy and your fiscal policy institutions separate. Think of it as economic separation of powers if that makes the analogy better. It would be like combining executive and judicial branches.

Bad. Idea.

Thealexa Becker wrote:How can you argue that Congress should control monetary policy?

I"m not saying they should control monetary policy. I was saying that the point is at least debatable and there are people on both sides of the issue.

You said the Fed was not controlled by Congress, and ultimately I was just pointing out that's not true. Whether they should control or not is a different story, but the fact remains, Congress does control the Fed via statute and could make changes to the Fed system any time they wish.

I happen to agree with you, Congress shouldn't get involved. If things are a mess now, just wait until those monkeys get a hold of it.

But I also want to make sure that the fact that Congress can control the Fed via statute is made clear, especially given all the drama about "who owns the Fed" and all that.

Yes, they do control the Fed by statue, but that is not the same as controlling their day to day actions. There is a HUGE difference. I know that Congress could change the directive for the Fed if they want, but they don't have an incentive to make that big of an alteration, because mostly what they say now is the Fed's policy is universally agreed upon by politicians as a rational idea. It is the day to day actions that people seem upset about.

And I usually don't say this in debates because it is bad form and both sides of an issue deserve to be represented, but the people who think that Congress should control the Fed really don't understand the workings of a macroeconomy. Or they have too much faith in our current Congress, which...hm...also not that great an idea.

Thealexa Becker wrote:And I usually don't say this in debates because it is bad form and both sides of an issue deserve to be represented, but the people who think that Congress should control the Fed really don't understand the workings of a macroeconomy. Or they have too much faith in our current Congress, which...hm...also not that great an idea.

Thealexa

Debate? More like casual discussion. No winners and losers unless you count us the taxpayers.

So is it better to have the Fed control themselves? Not so sure they have done that good
of job. Especially when you look at their role in the last lending crisis. When Congressman
Kucinich called them into a hearing it was the first time in 30 years they were called on to
actually answer for actions.

The dog and pony show in Congress ever year is a complete scam.

FWIW

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But would love to drag this back to if local politicians need vision....


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Jim O'Bryan wrote:

Thealexa Becker wrote:And I usually don't say this in debates because it is bad form and both sides of an issue deserve to be represented, but the people who think that Congress should control the Fed really don't understand the workings of a macroeconomy. Or they have too much faith in our current Congress, which...hm...also not that great an idea.

Thealexa

Debate? More like casual discussion. No winners and losers unless you count us the taxpayers.

So is it better to have the Fed control themselves? Not so sure they have done that good
of job. Especially when you look at their role in the last lending crisis. When Congressman
Kucinich called them into a hearing it was the first time in 30 years they were called on to
actually answer for actions.

The dog and pony show in Congress ever year is a complete scam.

FWIW

.

Jim,
The Fed did what they should have done in the crisis and there is ample evidence to support this. The Federal Government on the other hand can be debated. I stand by what I said about the Fed.

As for if local politicians need vision...I think we need to consider that most people elected to government at the local and even state level do not have all the qualifications to make the kind of sophisticated policy decisions that would really push our city or state forward.

Just because someone has an opinion about an issue that a lot of people agree with does not mean that they are able to run a government. What I find silly is that some people vote for local politicians on their stance on issues that are more national. I heard this from people during the last election and I thought it was insane.

What is even more frustrating is that some voters still fail to completely understand the issues they are voting for, and so they elect people with little or no vision based on superficial characteristics or distinctions.