Why is the Federal Reserve bad?

[Kat Kanning]

Can anyone explain it to me?

[Russell Kanning]

I really think the Fed helps control inflation .... after the US government gone, we should keep doing what the Federal Reserve says.

[KBCraig]

The federal reserve's job is for a handful of unelected, unaccountable individuals, mostly unknown and faceless, to control the value of the nation's money, and to artificially stimulate or limit the economy by setting interest rates and increasing or decreasing the amount of money in circulation.

This would not work if there were competing currencies. It only works because the government defines "money", and declare themselves sole arbiters of what "money" can be used. (People trading in precious metals are effectively bartering and evading taxes, and the IRS claims the right to tax and regulate barter. It's just a lot harder for them to do.)

Lately the Fed has made it their job to rescue huge international investment firms like Bear Stearns, by loaning them other people's money at discount rates. You don't even have to be a taxpayer: if you have money in a bank, they used your money to bail out Bear Stearns.

That's the short version from a non-economist.

[kola]

conspiracy!

there are here to help us!

[Russell Kanning]

but since the president appoints them ... they are probably looking out for the best interests of the people of the US

[Jacobus]

Why is the Federal Reserve bad?

It offers a bad product.  That bad product enjoys special government favor.

[Ron Helwig]

Typically, a government that has no sense but a lot of desire merely prints money. However, the power mongers had taken Mussolini's lesson to heart.

An aside: Mussolini's main discovery was that while communism wouldn't work because the producers wouldn't produce if they didn't own the results of their labor, the producers could be fooled into thinking they retained ownership and thus would continue to produce.

So, the power mongers used a similar idea: they would retain control over the supply of money but make it look like they didn't have control. Thus they created the Federal Reserve to print money for them.

What makes FRNs worse than U.S. Notes is that FRNs are backed by debt. Each FRN, paper or digital, represents a debt owed. Each time you use FRNs, you are supporting debt.
U.S. Notes are simply printed, and don't represent anything. Unfortunately, U.S. Notes (as bad as they are) are no longer in use.

If FRNs are deflated (such as paper ones getting destroyed faster than they are printed), the underlying debts need to be called in. That could destroy the economy if it happens fast enough.

[Russell Kanning]

but that is why we all just have to believe

[John Edward Mercier]

Can anyone explain it to me?

The Federal Reserve is the government's banker appointed by elected officials.

Government spending creates a huge burden on the masses. The Feds job is to make it all work without hindering this 'spending from thin air' that would otherwise need an increase in taxation.

So Congress takes credit for the 'milk from the cow', while the Fed handles the stuff coming out the back.

If you think of it from a home economics standpoint...
Its like someone blaming the bank that issued a credit card to them for their problems. Rather than taking personal responsibility for their actions.

Of this year's three trillion dollar budget, and taking into account Social Security surpluses, the government before even enacting the budget already projects it will spend more than four hundred billion more than it takes in. It already knows that it will expect its 'banker' to cover this four hundred billion. This of course does not include funding the oil subsidy that we call the War on Terrorism, and other off book expenditures.

[mackler]

It's only bad if you use it.

[ThePug]

Aside from the principle of a shady quasi-government body having a coercive monopoly on currency, the more pragmatic issue has to do with interest and credit. Used to be that the availability of credit was limited by the fact that the currency (gold for the most part) was finite. Bad speculation, i.e. malinvestment, was kept at a minimum because whenever there was a sudden rush of demand interest rates (the price of credit) would shoot up in accordance with the law of supply and demand. Vice versa during a slump- interest rates would fall, meaning credit was more available, thus spurring growth. In this way laissez-faire was self-correcting. Then the government got into the business, with the absurd idea that they could prolong economic growth by artificially keeping interest rates low. The only way to do this was by pumping new currency into the economy, which obviously can't really be done with gold. Thus was born fiat currency- "money" that the government could print at will to keep interest rates low. The Federal Reserve controls how much money is in circulation through a deliberately convoluted process that rests on a de facto nationalization of the banking industry, but the end result is the same as if the Fed ran the printing press out of their basement.

Not even the printing press can suspend reality, however, and the mild, quick corrections that happened under a gold standard simply didn't happen until the artificial-credit-fueled malinvestment formed such a huge bubble that when it popped, it sent the whole economy under. That's what happened in 1929, and it's what's happening right now on a (hopefully) smaller scale.

Oh, and all that funny money being flooded into the economy? Yeah, that's why the dollar of today is worth something like three cents on the 1913 dollar, the year the Federal Reserve was founded.


If you want to get a good laugh, pick up a copy of Ayn Rand's Capitalism: The Unknown Ideal and read Alan Greenspan's 1960s essays attacking the Federal Reserve and advocating a gold standard.

[ThePug]

Government spending creates a huge burden on the masses. The Feds job is to make it all work without hindering this 'spending from thin air' that would otherwise need an increase in taxation.

That, too. Though the stated (and probably primary) purpose of the Fed is to "manage" the boom-bust cycle that they themselves create. Making deficit spending possible is just an added "bonus" to the statists.

Really, deficit spending is just the government doing the same thing private investors do when there's too much bad credit- malinvestment.

[KBCraig]

The history and reason behind the Fed does a good job of illustrating why it's bad.

There were a series of bank panics in the late 19th and early 20th century, because bankers had started relying on "fractional reserves" -- that is, they only kept available a fraction of what their depositors had invested. If all the depositors wanted their money, it simply wasn't available. A rumor was all it took to start a run on the bank; people knew if they didn't get there first and close their accounts, they wouldn't get any money at all.

Because banks were private, local, and not connected to each other, these panics were small and localized. It was devastating to those who lost their savings, but the solution would seem to be private banking insurance, and using banks that held a greater percentage in reserve.

Instead, bankers created a system that relied solely on fractional reserves, and used the deposits of the Fed as their "cushion". They then felt free to make even riskier loans those that caused panics in the 19th Century, and the result was the great Crash of '29.

Ever since then, they've kept pumping the bubble higher and higher by artificially controlling interest rates, and adding or withdrawing money from circulation (mostly adding). The inflationary bubble is huge. When it pops, things won't be pretty.

The fed is both "banker to the banks", and "banker to the government". The U.S. Mint prints currency and mints coins -- when the Fed tells them to. The Fed buys coins and currency from the Mint, using money they make selling Savings Bonds, and then dumps that money into circulation. Buying a Savings Bond is just paying the Fed to make your money worth less.

[John Edward Mercier]

Actually the Fed increase are accounting entries. The amount of money in circulation is based upon demand for physical currency (most transactions are done without it).
Boom-Bust cycles are a natural effect inherent to capitalism, but some economist believe they can be avoided through the manipulation of credit... hence the Fed.
The Crash of '29 is blamed on many things... but leveraged speculation through option trading is the most probable cause.

[PattyLee loves dogs]

The Fed is bad because it inflates and deflates the dollar at will. Inflation destroys the information flow of a market economy. It also compensates politically favored banks for off-the-books Aid To Dependent Dictators, making it impossible to track foreign aid. Plus, whoever controls the Fed has the One Ring of Bond Trading, making their political faction financially invulnerable.

Here's my quick history of the Fed (with apologies to Tolkien):
http://www.strike-the-root.com/62/walker/walker1.html