Questions about the federal reserve

Great Debates
1

I have some friends (Ron Paul supporters) who are strongly against the federal reserve, to the point that they feel real progress in the country is impossible within the confines of the current system. I am a little leery of some of their assertions and was hoping some of the people here could clear some things up for me.

  1. Is the federal reserve in some way responsible for the current financial crisis by allowing banks to make loans to people with poor credit? In what fashion does the reserve regulate this sort of thing?

  2. What do the majority of other governments in the world do as far as money creation? If money is needed to finance some massive undertaking like a war, does the government create it or do they borrow it from some quasi-independent body like the federal reserve?

Thanks in advance and please do not hesitate to correct any misunderstandings implied by my questions…

2

Your friends, frankly, don’t have a clue what they’re talking about.

Even if the Federal Reserve did “allow” banks to make loans to people with poor credit, what of it? Are your Libertarian friends seriously suggesting that government regulation is the solution? :eek:

Anyway, to the best of my knowledge the Fed doesn’t have any regulatory powers in this area.
The US Federal Government does not borrow money from the Federal Reserve. They, like all other western governments, finance deficits by issuing bonds. Some of those bonds are traded by the Federal Reserve as a part of monetary policy – but it’s all done on the open market.

3

First, if you weren’t aware the Federal Reserve Bank is a privately owned bank, not a government institution. A fact the “government” does not advertise. You can read more about this unfortunate situation by Googling for “constitutional amendment federal reserve”. Back in the 30’s an amendment was enacted called the Federal Reserve Act.

Next, the FRB, is a privately owned bank with a government sanctioned “charter” (they can print money) and having no general oversight beyond the non-government appointed board of directors, can print money whenever they feel the need or the inclination. The need to issue currency is a necessity but we went off the gold standard a long time ago.

So how do they decide the value of currency?
Recall the big thing about “National Debt”?
Who do you think is the #1 creditor on the list of people the government, and in the mind of the FRB BOD the US population, owes?

So, what exactly is money based on?
How do they decide when to print more?
What happens if they print too much money?
How do they distribute this newly printed money?
How does this board of geniuses regulate an entire economy?
How do they resist the temptation to print money without working?

If you’re beginning to see gross dishonesty in the entire concept you’re not alone. The fact is, we as US citizens are being “farmed” by the FRB board and it’s stockholders, I’m sure none of which are US citizens.

A stable economy according to the FRB is an economy where the “farmers” (owners of the collective Reserve Banks) limit how much extra money they print in relation to the overall GNP (we’re referred to as the animals by the collective ideocracy of the FRB). If they print too much we see a devaluation of the dollar, recession, inflation etc. It’s doubtful they would ever print too little.

The FRB really only has two basic levers they can push and pull to regulate their “economy” and most of them do see the US as their personal property. Those two levers are the quantity of currency in circulation and the prime interest rate. You can figure the rest out from here.

If our currency were based directly on labor (1hour=1dollar*experience) and currency were created only as a means to trade labor, we’d have no problem with inflation because we would no longer be simply “animals”. Our economy would be very stable.

Someday when the people of the Earth get tired of all the lies, theft and blame there will be an uprising that will hopefully quell the current, constant economic disaster collectively titled the Reserve Banks.
-Tom

4

Absolutely untrue. There may not be any directly traceable transactions but they do indeed draw loan proceeds from the FRB. Who do you think finances wars? Not just in the US but abroad? Is al qaeda really the epitome of all evil in the world, or is it the dishonesty of the Global Banking Community at large, financing wars so they can make loads to rebuild?

Again, absolutely untrue. There may be US laws against such things as unregulated banking transactions but the FRB and it’s allied global reserve banks are not obligated or regulated by US banking policy or it’s laws. In fact their only reason for not destroying the economy is that they are dependent upon it. If you find out what’s happening you might revolt and that would be very bad for them. So they have a vested interest in keeping the economies of the world afloat. But, gross dishonesty, blame and lack of foresight are clearly taking a toll. I think it’s only a matter of time before the current economies of the world collapse. Possibly in my lifetime.
-Tom

5

Libertairans are, by definition, opposed to all government regulation. Do they really think that an unregulated banking system would not have gotten us into this mess? It was precisely lack of regulation of certain financial institutions that got us into it.

A harder question is whether the Federal Reserve could have prevented or at least ameliorated the situation. Given the deregulation during the Reagan years and after, it is hard to imagine they could have prevented it. They did act as cheerleaders and a policy of higher discount rates (the rate the Fed charges banks for turning bank loans into cash for the banks) might have discouraged all the excess credit.

Most of the regulatory controls on banks were put in during the 30s since it had become obvious that unregulated banks (and other financial institutions) were at least partly responsible for the great depression. It was thought that these controls would prevent such a depression from ever happening again. And I think they would have, had not a generation of bankers and politicians not appreared for whom regulations seemed to cause a brake on profits.

Another control that there used to be (I don’t know if still exists) was the margin requirement. In the fifties the margins on stock purchases were mostly 50% but sometimes raised to 100%. This meant that you had to put in cash at least 50% and sometimes 100% of what a stock costs. The margin requirement was set by the Fed. I assume they no longer have that power. If the margin requirements are high, they you cannot highly leverage your investments. On the other hand, you will not have to make forced sales to cover your margins. These forced sales did a lot to exacerbate the current crisis. In fact, they probably almost entirely explained it.

6

Standard conspiracy theory. From Wiki:

The Federal Reserve Act was passed in 1913. There was an amendment in the 1930s, true.

From the link you gave us:

The rest is opinion that doesn’t belong in GQ, which is for factual answers.

7

The U.S. Federal Reserve System is a central bank. These days, most other countries have a central bank, under one name or another.

8

The Fed is a quasi-government agency. It is most certainly not a private entity.

9

Exapno Mapcase et.al.;

Anything you don’t know about or agree with is a “conspiracy” theory?

Your mistaking the words “governing board” for the term “board of directors”. The actual FRB is a private bank. While there is a “governing board” with it’s head appointed by the president, the actual board of directors of the FRB made up mostly of it’s stockholders are not part of that board. As of February 2006, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System. Prior to that it was Alan Greenspan. From his wiki page:

Many “conspiracy theory” advocates thought having Greenspan as Chairman of the Governing Board was a conflict of interest. It’s suspected but never been proven that I know of, that he holds at least some of the FRB paper that’s now publicly rapidly loosing value, although it’s real value is only that of it’s weight in cellulose and ink. The only real value lies in the work and improvements generated by the work of the individual.

There have been few admissions or public information released on who actually holds controlling stock in the FRB(s) of the world. It’s not a conspiracy, it’s just “business”. It’s not necessary a bad system if it’s administered with honesty and integrity. Any banking system can work if it’s run by honest people. It’s when the stock holders of the bank forget or ignore who’s money and labor they are holding that things tend to go south in a hurry.

The president appointed governing board is responsible for making decisions related to when, if and how the US uses the FRB, not for the daily operation of the FRB itself. The announcements about the FED raising or lowering the interest rate are only partly correct. Interest rate calculations and requests are presented to the board of directors for approval before they are enacted, but the BOD can easily override the recommendation of the Reserve Banking System Governing Board and has before.

And this basic strategy is used the world over. Did you see the list HERE

The 1913 constitutional amendment was to ALLOW the US government to set up it’s own bank due in part to gross disorganization in the banking industry. After ‘the big one’ in 1929 the government was considered incapable of operating a bank and a second amendment was enacted that separated the government from banking. The predominant fear being we’d end up back in a monarchy like those our ancestors fled in England, France, Germany, Italy, Russia etc. Since even bank officials like their heads on their bodies it wasn’t difficult to convince enough congressman to push the amendment.

If you’ve ever read the congressional minutes for the period it’s curious to note both the timing and the way the actual amendment was ratified. I think it was just hours before the congress recessed for the season if I recall correctly. I think the intent was to get it passed quietly so there was not too much opposition by those who would misunderstand it’s intent.

Read a bit of history beyond the pubic propaganda and Wiki hype and you discover many interesting things. Relying on an advertising agency like Google, Yahoo, MSN, Fox, CNN, TNT etc. or a public Wiki for all your information is at the very least, uninformative.

-Tom

10

And Fort Knox if filled with Gold!

-Tom

11

Two “constitutional amendments” were enacted in 1913; the 16th Amendment (providing for an income tax) and the 17th Amendment (providing for direct election of U.S. Senators). Neither had anything to do with the creation of the Federal Reserve System, which was done by an act of Congress, not by a constitutional amendment.

12

From the wikipedia article titled: Federal Reserve System

AND

Who said the “FRB does not loan money to the US treasury”?
There is even an index on the Wiki…

13

It had to be a constitutional amendment. The original constitution forbid the government from any banking whatsoever. There is so much other hype on the internet regarding the Constitution and Banking that it’s difficult to separate factual documents from politically motivated dogma.

Look back further in history to when the Federal Reserve Act was initially written and you’ll find the initial constitutional amendment. I’m too lazy to go find it at the moment since there’s literally hundreds of pages of index alone and it might not have been digitized yet.

You’ll probably have to search the Congressional Library to find the actual session minutes. If you feel so inclined a search could begin here http://catalog.loc.gov/ but it won’t change the current situation.

-Tom

14

:dubious:

Which constitutional amendment was it, then? There have been a grand total of twenty-seven of them (none more than a few paragraphs long); here is the text of the first ten, and here are the other seventeen.

No need for any lengthy searches of any musty archives; a few pages of material is all.

15

Well, if it had to be a constitutional amendment, your case is lost, because it wasn’t.

Here’s the full text of the Constitution. You can also search to confirm that your notion that “The original constitution forbid the government from any banking whatsoever.” is equally factually wrong. The word bank or any equivalent doesn’t appear in it.

The rest of your posts are of equal null factual value.

You’re new here so I’ll repeat what I said earlier. GQ is for factual information. If you want to argue that we should return to a gold standard or whatever your conspiracy theory requires you should start a thread in Great Debates.

16

With apologies to the OP, given the turn this thread has taken it’s going to be best to move it to GD. I trust you will receive some factual information there related to your original questions in between the debunking of the misinformation siggma has been providing.

Colibri
General Questions Moderator

17

Whether or not the federal government had the constitutional authority to charter a central bank was a subject of much controversy after the Constitution was ratified. The First Bank of the United States was chartered in 1791 during President Washington’s first term. It was supported by the Hamiltonian Federalists and opposed by the Jeffersonian Republicans. When the Federalist Party fell by the wayside the bank charter was allowed to expire but the Republicans later found themselves in the uncomfortable situation of adopting Hamilton’s arguments in favor of constitutionality when they chartered the 2nd Bank of the United States. The idea was still controvertial and lead to the landmark decision in McCulloch v Maryland that the Constitution grants implied powers to the Congress in order to carry out its express powers.

18

Thank you, I stand corrected.

I need to read more history myself. I may have been mistaking an act of congress for an amendment. Government banking was then and still is controversial.

I missed pointing out that the Federal Reserve System is not the Federal Reserve Bank. The FRB serves the FRS by providing financial and consulting services. I recall watching a NOVA show about the issue.

As for Libertarians, there seems no satisfaction beyond death…
-Tom

19

You should continue to have missed. There is no such thing as the Federal Reserve Bank. There are twelve regional Federal Reserve Banks and they comprise the Federal Reserve System. They’re the banks that actually operate and move money to and from individual member banks. They do provide financial and consulting services, but you’d kinda expect that of a central bank.

The FRS and the FRBs are inseparable and indistinguishable. You’re providing further blatant misinformation.

We’re beyond irony at this point.

20

I would argue that the federal reserve policies from the nineties till now were PART (and let me emphasis “part” as I learned from past threads) of what caused the situation we’re facing.

One of the goals, as I see it, of the fed is to damper the affects of business cycles (which Austrians believe are created by the fed but that is an aside). It uses its various tools to try and manipulate loaning and spending in order to try and create steady and healthy GDP growth, usually between 2-4% if I remember correctly.

Well, long story short, low federal funds rates instituted due to the 9/11 crash created low long term interest rates, which influence mortgage rates. Money became cheap. This environment created by the fed, in conjunction with crap lending standards, shady practices by the lending industries,federal government belief in “every American deserves a home” and policies originating from this mindset, and redistribution of risk through investment tools, created the mess we are in today.

This is off of the top of my head. Feel free to comment.