The Fed, And Why It Stinks (Part Two)

Simply explaining the Federal Reserve System’s operation isn’t easy if you’re not an economist. There’s a specific jargon, that jargon’s definitions and usage illustrates more of the governmental “newspeak” used in Orwell’s classic 1984. I feel the victim of a “thought crime”.

We know the 1907 Aldrich Plan was the genesis of this program to address Bank Panics. Senate Republican Leader Nelson Aldrich visited Europe and studied various banking systems in 1907. He settled on using the German monetary system because he believed the American system of uncontrolled banking was its own worst enemy. On returning, he proposed his system and immediately ran afoul of the politics conspiring to control the banking industry anyway they could. Rural and western states felt the Aldrich Plan unfairly benefited eastern bank interests and jeopardized others. When the Democrats won both houses of Congress and a Democrat President was elected, Aldrich’s plan was dismantled. It was used as a foundation for the new Federal Reserve Act.

The Board of Governors was transferred from private control to one of governmental control. After study and debate, the Federal Reserve Act 0f 1913 was passed along party lines with Democrats out voting Republicans by a wide margin.

The current function of the Fed is as follows: address the issue of bank panics, serve as the central banking authority of the United States, use the centralized authority of the government to supervise and regulate banks and protect the citizens’ exercise of their needs for credit. Additionally: the Fed manages the governments’ supply of money by directing national monetary policy and hopefully (though with conflicting ends to be met at times); promote maximum employment, stabilize prices and hopefully preventing deflation, inflation or other resultant conflicts and moderating interest rates over the long term. The Fed tries to stabilize the financial systems and control financial risks.  Payment exchanges are facilitated between regions controlled by the Fed and responds to the needs of regions and banks having cash-flow or liquidity issues. In the end the goal is to strengthen the United States standing in the world economy.

Bank runs are when people panic and start removing their money from banks. They removed more than was available at times and panic ensued when the banks literally shut their doors to prevent violence. People were told there physically was not enough money in house to give everybody cash on demand.  To combat this, the theory of “Elastic Currency” was brought into the jargon. The Fed allows for printing more currency. This is where “currency can, by the actions of the Central Monetary Authority, expand or contract in amounts warranted by economic actions”. (Wikipedia 2011).

This allowed the Fed to become the lender of last resort when banks suffered setbacks by disasters and emergencies having adverse reactions on the local economy. There’s been controversy because it shifts responsibility away from individual banks/corporations and puts it on everybody’s backs in the form of inflation.

This effort mutated over the years to cover policies affecting private industries and corporations trading in securities and other transferable monetary transactions. Insurance companies (both national and international), Stock Traders and Investment Companies were placed under the rules and regulations of the Fed. The Fed oversaw the operations in such a lax manner financial disaster loomed on the surface of daily business in the second millennium. The financial insecurity of some of these global, but American based institutions settled on the surface the American economic scene like a killer algae threatening to choke the life out of the economy. The Fed decided to “Bail Out” companies like American International Group (AIG-insurance), General Motors (GM- automotive/banking) and others because they were “too big to fail” or were so critically attached to the American monetary and economic system, their failure in the corporate world would destabilize the world investment market. AIG received $85 BILLION dollars to stabilize their books then paid out millions of dollars in bonuses to executives and administrators of these “corporate welfare recipients”.

Criticism and suspicion of the Fed’s operating principles mounted and actions mounted because of a lack of full accountability.

(More to come)

Thanks for listening.

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