the Federal Reserve and the US debt.

I have just learned that the federal reserve is privately owned (by other banks) and I have a few questions.

  1. Does the federal reserve control the US currency? Can it call the mint and order 1 billion dollars more if it had a borrower for that money (say another bank?)
  2. If the federal reserve makes money lending money, what incentive does it have to stop lending money and reduce debt?

After reading this, I think I am missing a bit of knowledge regarding economics. After all, the government is the one who controls the national debt. Right?
Does the federal reserve get its instructions from Washington? So confusing. No wonder people don’t know who to vote for.

A good place to start is on the Fed’s own** government web site** FAQs page —> http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm

Note this part:

Cecil’s take on the Federal Reserve.

-XT

The Federal Reserve is nominally owned by the big banks, but it is controlled by the government, in that the Board of Governors is appointed by the President and confirmed by the Senate.

The Federal Reserve does not control currency as such, they control the “money supply” by adjusting the interest rates at which they lend to their member banks. Higher interest rates mean banks must pay more to borrow money, which means they must charge more to lend money, which means fewer people borrow, which decreases the money supply. Lower interest rates encourage borrowing, increasing the money supply.

The precise mechanism by which they lower and increase interest rates is pretty complicated and involves auctioning Treasury securities and I don’t exactly understand it myself.

As for hard currency (the stuff printed by the Mint and the Bureau of Engraving and Printing) – this represents a tiny, minuscule fraction of the actual money moving around. Banks which need currency order it from their regional Federal Reserve Bank, and send an electronic wire transfer to pay for it. The Fed works with the Department of the Treasury to ensure that enough is printed and minted to meet the demand of local banks.

The government does control the national debt, in that Congress decides how much to spend and therefore how much to tax and borrow. The national debt isn’t directly related to what the Fed does; the Treasury is in charge of collecting taxes, issuing bonds, and paying debts on behalf of the federal government.

Here is another article from The Master on the subject of how money is created:

-XT

Arthur Burns, appointed Fed Chairman by President Nixon, said of his role in keeping the economy on an even keel, “The Fed’s job is to take away the punch bowl just as the party’s really getting started.”

In addition to the political appointees mentioned above, the Fed is controlled by bankers. Bankers hate inflation worse than anything. Unexpected inflation makes the money they loaned out five years ago worth less when it is repaid. Bankers hate inflation even more than your grandmother does–at least her social security gets a COLA. Bankers hate inflation way worse than governments, and fight it much harder. Congress would be much more likely to loan money out willy-nilly to make people happy today. Bankers have to protect the value of the money that is already out there.

The Fed does sometimes make money, although it’s technically a nonprofit institution. Some money it makes is paid to it’s member banks as dividends and the rest is turned over to the US Treasury. Out of $81 billion it made last year, $78.4 billion will go to the Treasury. Both those numbers are record highs, by the way.