How the Fed Works
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Fed’s Stated Objectives
Objectives from the Original Federal Reserve Act of 1913:
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In 1977, Fed‘s responsibility was expanded to include:
2. stable prices
3. moderate long-term interest rates.
From Fed’s Website:
Click here to see how well the Fed has or hasn't met these objectives.
- Achieving macroeconomic stability: “to maintain long-run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of:
2. stable prices
3. moderate long-term interest rates.
From Fed’s Website:
- The Fed's goal is to achieve “better economic performance by acting to contain financial disruptions and preventing their spread outside the financial sector.”
Click here to see how well the Fed has or hasn't met these objectives.
How the Fed Works
There are twelve regional reserve banks concentrated in the East and in the Midwest. The stockholders of the Federal Reserve regional banks are the privately owned member banks that fall under the Federal Reserve System. About 38% of the nation's more than 8,000 banks are members of the system
The private banks do get to elect the regional bank's board of directors. But, when it comes to national policy, they have little say. The Board of Governors which coordinates national activities is made up of seven members appointed by the president. Even though there were twelve regional banks, Wall Street bankers run the show.
The Federal Open Market Committee, now based in Washington, directs the Fed's instrument of monetary policy: the purchase and sale of government debt on the open market. To increase the supply of money the Fed buys government securities from a few handpicked firms with newly created money it creates out of thin air with the press of a button (this is what they are doing with QE2). To tighten money and credit, the Fed sells securities. The Fed can act on its own discretion with no oversight.
Another device the Fed uses to control the amount of money in circulation is setting the discount rate: this is the interest rate charged to member banks when they borrow short term from the so-called "discount window." If the Fed lowers the discount rate for its loans, commercial banks will likely borrow more from the Fed. This increases the amount of funds banks have to lend. Bank credit thus becomes cheaper, as reflected in lower interest rates on bank loans and credit cards. The increase in funds available for banks to lend also increases the amount of money in the economy.
But the Fed's real power lies in its monopoly to create money. Although the US was still on the gold standard when the Fed was created in 1913. The value of the federal reserve notes, or what we typically call dollars, were quickly eroded as the Fed continued to expand the money supply until we renounced the gold standard completely. Now they are free to print as many federal reserve notes as they desire. The money we have in circulation is not US dollars from our government. They are Federal Reserve notes from a private banking cartel.
There are twelve regional reserve banks concentrated in the East and in the Midwest. The stockholders of the Federal Reserve regional banks are the privately owned member banks that fall under the Federal Reserve System. About 38% of the nation's more than 8,000 banks are members of the system
The private banks do get to elect the regional bank's board of directors. But, when it comes to national policy, they have little say. The Board of Governors which coordinates national activities is made up of seven members appointed by the president. Even though there were twelve regional banks, Wall Street bankers run the show.
The Federal Open Market Committee, now based in Washington, directs the Fed's instrument of monetary policy: the purchase and sale of government debt on the open market. To increase the supply of money the Fed buys government securities from a few handpicked firms with newly created money it creates out of thin air with the press of a button (this is what they are doing with QE2). To tighten money and credit, the Fed sells securities. The Fed can act on its own discretion with no oversight.
Another device the Fed uses to control the amount of money in circulation is setting the discount rate: this is the interest rate charged to member banks when they borrow short term from the so-called "discount window." If the Fed lowers the discount rate for its loans, commercial banks will likely borrow more from the Fed. This increases the amount of funds banks have to lend. Bank credit thus becomes cheaper, as reflected in lower interest rates on bank loans and credit cards. The increase in funds available for banks to lend also increases the amount of money in the economy.
But the Fed's real power lies in its monopoly to create money. Although the US was still on the gold standard when the Fed was created in 1913. The value of the federal reserve notes, or what we typically call dollars, were quickly eroded as the Fed continued to expand the money supply until we renounced the gold standard completely. Now they are free to print as many federal reserve notes as they desire. The money we have in circulation is not US dollars from our government. They are Federal Reserve notes from a private banking cartel.
How is 'money' created in the United States?
Click here for a history of the US Dollar
In the US we use a fiduciary media of IOUs backed by IOUs as money. We have a debt-based monetary system. Here's an overly simplified example to explain:
So, Congress spends more money that it takes in, but it wants to keep funding government programs. Congress goes over to the Treasury department, but the Treasury doesn’t have money because Congress spent it all. So, the Treasury prints US Treasure Bonds/Bills/Notes. This is debt. This is a loan. This is an IOU from Uncle Sam.
When the government can’t fund its programs with private debt buyers, it walks down the street to the Federal Reserve. In overly simplified term, the government sells its US Treasury debt to the Fed when nobody else wants to buy it. The Fed writes the government a check for billions of dollars with "money" it just creates literally out of thin air. It clicks a few buttons on a computer and expands its balance sheet. This mean that they make one of their account numbers bigger, but there are no real assets that back it. You and I would go to jail for writing a check from an account we just make up, but Congress wants the Fed to do this so they can fund their programs, so it is legal. It is counterfeiting, but it is "legal".
To recap...The Fed creates money (literally out of thin air) to purchase assets from private dealers (usually Treasuries, but can be any asset) by writing the dealers a check drawn on the Fed itself. The dealer deposits the newly created money in the bank and money enters the economy. Magic.
This counterfeiting power must be accompanied by social redistributive measures that generate the support necessary to overcome any resistance. So the government plays Santa Claus and hands out gifts by way of things like subsidies and entitlement programs. This keeps the masses appeased.
That would be bad enough in itself, but our story gets a little worse. The government doesn't actually sell the debt directly to the Fed. It sells debt to a few hand picked firms (see list of primary dealers below). These firms in turn sell the debt to the Fed at marked up prices. This is just another way the system is set up for the big banks like Goldman Sachs to make money off of you, the average American.
Click here for a history of the US Dollar
In the US we use a fiduciary media of IOUs backed by IOUs as money. We have a debt-based monetary system. Here's an overly simplified example to explain:
So, Congress spends more money that it takes in, but it wants to keep funding government programs. Congress goes over to the Treasury department, but the Treasury doesn’t have money because Congress spent it all. So, the Treasury prints US Treasure Bonds/Bills/Notes. This is debt. This is a loan. This is an IOU from Uncle Sam.
- People in the private sector can go direct to treasury and buy bonds as an investment. Some consider these investments "safe" because this debt is backed by the faith and credit of the US government.
When the government can’t fund its programs with private debt buyers, it walks down the street to the Federal Reserve. In overly simplified term, the government sells its US Treasury debt to the Fed when nobody else wants to buy it. The Fed writes the government a check for billions of dollars with "money" it just creates literally out of thin air. It clicks a few buttons on a computer and expands its balance sheet. This mean that they make one of their account numbers bigger, but there are no real assets that back it. You and I would go to jail for writing a check from an account we just make up, but Congress wants the Fed to do this so they can fund their programs, so it is legal. It is counterfeiting, but it is "legal".
To recap...The Fed creates money (literally out of thin air) to purchase assets from private dealers (usually Treasuries, but can be any asset) by writing the dealers a check drawn on the Fed itself. The dealer deposits the newly created money in the bank and money enters the economy. Magic.
This counterfeiting power must be accompanied by social redistributive measures that generate the support necessary to overcome any resistance. So the government plays Santa Claus and hands out gifts by way of things like subsidies and entitlement programs. This keeps the masses appeased.
That would be bad enough in itself, but our story gets a little worse. The government doesn't actually sell the debt directly to the Fed. It sells debt to a few hand picked firms (see list of primary dealers below). These firms in turn sell the debt to the Fed at marked up prices. This is just another way the system is set up for the big banks like Goldman Sachs to make money off of you, the average American.
Who owns the Federal Reserve System?
It is true the Federal Reserve is not an agency of the Federal Government. It is a corporation chartered by Congress, but it does not operate like a private corporation. Its stock certificates are held by the member banks in the system. However, the stock certificates do not carry with them any powers of private ownership. Holders of stock certificates cannot sell them like you could as a truly private corporation. The larger banks put up more capital but all have one vote. A vote really doesn’t buy anything at the national level thought. The Fed is run by a Board of Directors, all appointed by the President. The National Board selects regional heads.
In essence we have a hybrid partnership between government and private cartel.
Primary Dealers
Primary dealers are banks and securities brokerages that trade in U.S. Government securities with the Federal Reserve System. These banks have extraordinary special privileged when it comes to dealing with our money. (Primary dealers' daily average trading volume in U.S. Government securities was approximately $570 billion during 2007).
List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York (11/1/2010):
- BNP Paribas Securities Corp.
- Barclays Capital Inc.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (USA) LLC
- Daiwa Capital Markets America Inc.
- Deutsche Bank Securities Inc.
- Goldman, Sachs & Co.
- HSBC Securities (USA) Inc.
- Jefferies & Company, Inc.
- J.P. Morgan Securities LLC
- Merrill Lynch, Pierce, Fenner & Smith Incorporated
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. Incorporated
- Nomura Securities International, Inc.
- RBC Capital Markets, LLC
- RBS Securities Inc.
- UBS Securities LLC.
The Revolving Door: Federal Reserve / Government / Goldman Sachs
Goldman Sachs reported a record $13.4 billion dollar profit in 2009 while the country much of the country was in recession.
This government-granted private banking cartel certainly has a cozy relationship with the US government, and vice-versa:
- The president of the NY Fed, William Dudely, was the chief economist for Goldman Sachs before joining the Fed two years ago.
- Treasury Secretary Henry Paulson is a former Goldman CEO.
- Arthur Levitt, the head of the Securities and Exchange Commission is a now a Goldman adviser.
- E. Gerald Corrigan President of the New York Fed from 1985 to 1993. Joined Goldman Sachs in 1994 and currently is a partner and managing director.
- Jon Corzine Former Goldman CEO. Worked at Goldman from 1975-1998. Governor of New Jersey from 2006-2010; U.S. Senator from 2001-2006 where he served on the Banking and Budget Committees.
- Henry H. Fowler - Secretary of the Treasury from 1965-1968. After leaving the Treasury Department, Fowler joined Goldman Sachs in New York City as a partner.
- Robert RubinTreasury Secretary from 1995-1999; Former Co-Chairman at Goldman Sachs.
- Robert Zoellick - President of the World Bank since 2007. Vice Chairman, International of the Goldman Sachs Group, and a Managing Director and Chairman of Goldman Sachs' Board of International Advisers.
The list goes on……
Click for the Federal Reserve's Accomplishments Since 1913
