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abitare (99.43)

What is the Federal Reserve?

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December 14, 2007 – Comments (9)

If you are an investor, you need to know what the Federal Reserve is. Many people talk about the FED, but do not have any idea really what FED is / does.

The Federal Reserve, by artificially manipulating interests rates, creates investment "bubbles" and creates business cycles. It is extremely lucrative / wise to take advantage of the business cycle and / or to avoid the FED bubbles.

The Federal Reserve rate manipulation was a primary caused of the Great Depression according to the Austrian School of economics.

CSPAN - Congressmen Paul grilling the Helicopter Ben:

http://video.google.com/videoplay?docid=-4031795252856609357&q=ron+paul+federal+reserve&total=852&start=0&num=10&so=0&type=search&plindex=4 

The video is from Edward Griffin, who wrote a book on Creature From Jekyll Island A Second Look at the Federal Reserve.

The video is 42 minutes, whether you like the FED or not, I believe it is worth watching to understand the position of those, who are opposed to the fait money system.

http://video.google.com/videoplay?docid=6507136891691870450 

9 Comments – Post Your Own

#1) On December 15, 2007 at 12:25 PM, leohaas (93.93) wrote:

"The Federal Reserve, by artificially manipulating interests rates, creates investment "bubbles" and creates business cycles."

Actually, their goal is exactly the opposite: to prevent bubbles, recessions, and depressions. We can debate how good they have been at achieving that goal... Considering the mess we are in today as a result of overly stimulating some sections of the economy, I'd rate it "F". 

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#2) On December 15, 2007 at 2:51 PM, GS751 (28.09) wrote:

very intersting video.  I like the title of his book and it was interesting when he talked about how the fed was formed with who.  Thank you so much for posting this.  The goal of the fed is to promote their own self interest.

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#3) On December 15, 2007 at 5:44 PM, camistocks (< 20) wrote:

In my view the Fed is not alone responsible for the current housing mess. I believe it is extreme capitalism, or as politicians in Europe from left to right like to say: wild west capitalism. There are not enough regulations. Free markets may clean up this mess, but it's also free markets with no sound regulations that brought the US here (the UK and Australia too for that matter. The UK has a bigger housing bubble than the US.

Switzerland has very low rates. The target range (no target rate) for short term rates is currently 2,25-3,25%. 5 year fixed mortgages are between 3,75% and 4,1%. ARMS are between 3-3,5%. But there is no bubble here, because there are (too?) many regulations.

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#4) On December 15, 2007 at 8:54 PM, abitare (99.43) wrote:

Thank you for the replies.

leohaas,  

I understand the FED "goal". Reguardless of FED's intention I believe the market would be better at determining interest rates then the FED. I would give the FED an "F" also. I would have a discussion about kicking the FED out of class. ie abolishing the Federal Reserve.

GS751,

Concur, the primary goal of the FED is survivial. Even though the purchasing power of the dollar has lost 96% of it's value since the FED was created, the FED still pretends to protect the currency.

camistocks,

Concur, the FED is not alone in causing the housing mess. I would blame the Congress more. The Congress should have over site over the FED, Fannie, Freddie, HUD and the Dollar. But I do not believe most members of Congress have the knowledge, wisdom or even ethics to provide a decent oversite of these institutions. 

The Congress has a very short sighted / short term vision. They over involve themselves in issues that should be left to the market. The Congress also has members that sign legislation, with out understanding or caring about the long term consequences, as long as their "ear marks" are approved.

Rates alone are not the problem here in the US. The US has over built, over borrowed, over leveraged and is under capitialized. The fall out is going to be hard on those, who are not well prepared for a recession or slow down. I hope their is not a panic or a depression. 

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#5) On December 16, 2007 at 7:07 PM, jdavis234 (45.47) wrote:

Anxious to check out the video. If you don't know already, though, the Federal Reserve was created as a reaction to the financial crisis of 1908, when the market sunk 50 percent. J.P. Morgan locked the top banking minds in a room until they came to terms on what could be done to alleviate this catastrophy.  The markets eventually regained order. The government shortly after created the Federal Reserve. This is interesting because there is certainly a difference between how private banking handled this and how the Fed handled the great depression. Despite this, I believe the Fed is a certain necessity. Without it, the credit turmoil today could be much more catastrophic.

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#6) On December 16, 2007 at 8:43 PM, abitare (99.43) wrote:

jdavis234,

"I believe the Fed is a certain necessity. Without it, the credit turmoil today could be much more catastrophic. "

Totally disagree. Lets have Dr Paul explain it:

http://www.youtube.com/watch?v=yAwvlDJgJbM 

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#7) On December 16, 2007 at 10:27 PM, abitare (99.43) wrote:

From my post at on another blog relevant here: 

"what asset would you have us back the dollar with?"

The Constitution allows for gold and silver. The Federal Reserve System has total assets of about $1.2 trillion. The report is here:

http://www.federalreserve.gov/releases/bulletin/1007assets.htm

The derivatives market in terms of the number of transactions is huge, but so are the transactions on the world's currency futures markets. Here is where brokerage firms make their commissions. The most recent reported figure is $516 trillion.

Derivatives of debt, currencies, commodities, stocks and interest rates rose 25 percent from the previous six months, the biggest jump since the Basel, Switzerland-based bank began compiling the data. Investors have been turning to credit derivatives as a way to speculate on a growing risk of defaults amid record U.S. mortgage foreclosures.

Think this through. For every winner, there is a loser. This is a gigantic futures market.

So, what happens if some big, unexpected event occurs, and a lot of markets move in one direction? There are lots of winners. There are also lots of losers.

The winners contact their brokers and say, "Have the losers send us the money. We are cashing in." The brokerage firms call the losers. The losers say, "Sorry, Charlie, we're broke. Sue us."

Down go the dominoes.

The losers will outnumber the winners. This is because the losers will take the winners down with them. The winners will have planned on the losers covering their losses. This will not happen in a major crisis. It's the old question: "Who will insure the insurers?"

Do you understand why it would be a good idea to have hard assets as a competing currency in order to avoid this insane level of leverage?

There is a systemic risk created by the fiat currency and the federal reserve, it is is very real.

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#8) On December 17, 2007 at 1:46 PM, StockSpreadsheet (74.46) wrote:

abitarecatania,

You need to look at that table from your link more closely.  The $1.2 trillion in assets held by the Federal Reserve is U.S. Treasury notes owned by foreigners that are held in custody for them at Federal Reserve banks.  These are not assets owned by the Federal Reserve.  These are assets owned by foreigners that are stored in Federal Reserve banks.  This is similar to you having a safety deposit box at your local bank.  The contents of the box are yours, not the banks.  The bank is just holding them for you, (and charging you a fee for the box for them to securely store your assets for you).   Storing the Treasury notes at a Fed bank means that they don't have to ship them across the ocean to their home countries and that they are easier to sell or redeme whenever they want to, (since they are already here in this country).

According to the Fed chart, the total value of their gold assets as of September 2007 is about $11 billion, plus they hold about $44 billion in foreign currency.   Considering the U.S. economy is valued at about $13.13 trillion, $11 billion in gold reserves is nowhere near enough gold to support a gold standard in the U.S..  Also, I read on one of the links cited in my blog post regarding the gold standard that our outstanding currency is valued in the neighborhood of $550 billion, so the $11 billion in gold would only be worth about 2% of our currency in circulation, so we don't even have the option of minting gold coins to replace a significant portion of our currency in circulation. 

About the only thing you could do is for Congress to pass a law that says that the Fed has to keep the currency within a certain range regarding the price of gold, (for instance, the price of gold should always be between $900 and $1,100 an ounce), and that the Fed would need to raise or lower interest rates or raise or lower the reserve requirements for banks to insure that the price of gold stays within this range.  This would leave the dollar open to manipulation by foreign nations who could flood or buy up outstanding gold production or reserves to force wide swings in interest rates or reserve requirements as the Fed tried to keep the dollar within that range.  That would wreak havoc on the economy.

Therefore, I still don't see how a gold standard is possible in any true sense.  

Craig 

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#9) On December 17, 2007 at 5:23 PM, abitare (99.43) wrote:

Craig,

Thanks for the reply.

“The $1.2 trillion in assets held by the Federal Reserve is U.S. Treasury notes owned by foreigners that are held in custody for them at Federal Reserve banks.  These are not assets owned by the Federal Reserve.  These are assets owned by foreigners that are stored in Federal Reserve banks.” 

Copy. The point is the FED has $1.2 trillion reserve for a $500+ trillion market. This = NOT GOOD = systemic risk

“Considering the U.S. economy is valued at about $13.13 trillion, $11 billion in gold reserves is nowhere near enough gold to support a gold standard in the U.S.”

Yep, this = NOT GOOD = more systemic risk

“About the only thing you could do is for Congress to pass a law”

Dear GOD NO! NOOOOOOOOOOOO!!!!!

Congress could audit the FED once it learns about the systemic risk involved. It could allow for competing currencies and people could use gold and silver or copper or some HARD ASSET NOT LEVERAGED. The US dollar is likely doomed.

“That would wreak havoc on the economy.”

The havoc is inbound. The dollar is down 50% to the Euro. Oil has gone from $27 – 91, gold $270 – 800, silver $5- 16 etc… Housing, banking, retail, builders etc… are in trouble.

“Therefore, I still don't see how a gold standard is possible in any true sense.”  

No one is suggesting a pure gold standard. What Ron Paul and I are suggesting is allow for the personnel use of gold and silver.  And allowing competing currencies by state and regionial banks that are responsible, uncorrupted, un leveraged and unlike the FED.

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