What's going on with the Federal Reserve?
October 20, 2011 5:38 AM   Subscribe

Why are people mad at the Fed?

The Federal Reserve seems like a strange extension of the Federal Government. For one, because it's privately-owned. For another, because it's sort of a business and sort of...government?

It is difficult to conceptualize. And doing googling, too much noise gets in way of signal.

Nonetheless, as an organization it smacks uncomfortably of unchecked paternalism. And am I correct in perceiving that money can be—and has been—printed and put into circulation.

(There seemed to have really been a lot of new money being used in Iraq and Afghanistan. In suitcases, et al.)

Where is the checks and balances? Where's the transparency? Am I understanding these issues correctly? Amazingly, this is all new to be me as a consequence of Occupy Wall Street. So, what gives with the Fed?
posted by Mike Mongo to Law & Government (40 answers total) 14 users marked this as a favorite
 
Can you provide a recent example of someone being "mad at the Fed"?
posted by dgeiser13 at 5:52 AM on October 20, 2011


Where is the checks and balances? Where's the transparency?

Both are sorely lacking.

Federal Reserve Board Rife With Conflict Of Interest
posted by Fuzzy Monster at 5:53 AM on October 20, 2011 [1 favorite]


Re people being mad at the fed: the occupy wall st protesters often carry signs that say "end the fed.". I suppose this kind of thing is what the op means by people being mad at the fed.

Also to the op: the fed is not privately owned. It is part of the government. It is supposed to be independent of the executive branch (under whose hierarchy it nominally falls) but this is troublesome to some because its independence allows it to be opaque in its operations.
posted by dfriedman at 6:05 AM on October 20, 2011 [2 favorites]


The Federal Reserve has been doing something called "quantitative easing", which is another term for borrowing/printing money and putting it into circulation. They have been doing this in order to buy bad loans and mortgage-backed financial instruments, to stem foreclosures and hold off deflation, where people hold off on buying things because they will be cheaper in the near future.

The money they have been putting into this policy is more than has been borrowed to pay for bailing out banks and failing industries.

Because the QE plan has the goal of reducing foreclosures and keeping a largely consumer-based economy running (and accordingly keep people in homes and jobs), I'm not sure why Occupy Wall Street would be opposed, but the Ron Paul/survivalist/Tea Party/dominionist crowd are opposed, because they do not believe that this entity should have the ability to print money and further weaken the dollar (at least under an Obama administration; they didn't complain so much when Bush was doing this). Perhaps there is some overlap between the two contingents, but I'd be skeptical.
posted by Blazecock Pileon at 6:06 AM on October 20, 2011 [4 favorites]


The Fed doesn't print money. They create money via fractional reserve banking, just like any other bank creates money.
posted by empath at 6:15 AM on October 20, 2011


(There seemed to have really been a lot of new money being used in Iraq and Afghanistan. In suitcases, et al.)

That's not what people mean by the Fed "printing money" which they don't literally do, they increase the money supply which is not the same as the currency supply.
posted by atrazine at 6:20 AM on October 20, 2011 [1 favorite]


Where is the checks and balances? Where's the transparency?

The Fed's board of governors is appointed by the President, and the Fed was created by an act of congress so ostensibly it acts under congressional oversight.

But what checks and balances did you have in mind? As devil's advocate, let me suggest that a degree of autonomy is important for the Federal Reserve --- it protects them from being used as a pawn in petty partisan histrionics a la the debt ceiling fiasco.

The Treasury creates currency, and the Fed distributes new currency to banks, who then distribute it to consumers. Money is not printed "out of thin air"; every dollar printed is backed by some form of security, or is replacing currency that has been taken out of circulation and destroyed (the lifespan of a $1 bill is less than two years).

The Fed's decision making process is not transparent, but AFAIK the tools at their disposal are all quite visible, e.g. manipulating interest rates.
posted by qxntpqbbbqxl at 6:31 AM on October 20, 2011 [4 favorites]


Some people are opposed to central banking in principle as well. They might do well to examine the difficulties the Confederacy had in controlling the money supply while individual states, cities, and even enterprises were still able to issue debt in the form of notes (this on top of the war, the Union blockade and the self-imposed cotton embargo).
posted by TheWhiteSkull at 6:31 AM on October 20, 2011


Nonetheless, as an organization it smacks uncomfortably of unchecked paternalism.

Well that's sort of a feature not a bug. The Fed is supposed to be politically remote. One of its jobs is to oversee price stability and growth and find an appropriate trade off between the two. When it fails (see Greenspans unwillingess to pop the tech and housing bubbles) it tends to fail because it doesn't want to make unpopular decisions, when it is wildly succesful (Volcker raising rates in the 80's) it is often doing things that are very unpopular in the short term. If you start allowing politicians some oversight over this process then you inherently start politicizing things - which you don't want.

Its other task is to monitor and regulate the banking system (Although not actually as its day-to-day regulator - that job is held by the OCC and the SEC's of the world). The is where it fulfills its role as "the bankers bank."There is a decent amount of evidence that relations between the regional fed banks and the private banks is way too cozy, and as a result the Fed was far more activist in its efforts to bail out banks. Particularly noteworthy was how it changed rules surrounding collateral that it would allow to be pledged for loans (central banks only do secured lending-so the banks have to provide the fed some security as collateral).

I think the OWS crowd is quite reasonably fixated on the later, while the Paulista/Gold Bug/Austrian crowd is fixated on the former. This crowd is pretty much opposed to central banking and fiat money on principle.

(Also QE was a reaction to exhausting traditional monetary policy more than it was a plan to continue bailing out banks and what not)
posted by JPD at 6:38 AM on October 20, 2011 [2 favorites]


Now that many of your misconceptions have been addressed, back to the original question.

The Fed (along with the Treasury) orchestrated the unpopular, and (at best) only partly-successful bailouts of some major banks to avoid further economic collapse. This has been seen by many on "both sides" of America's political spectrum as having been a rescue of the undeserving (the same banks whose risky ventures actually precipitated the Recession), with heavy favoritism (former Treasury Secretary Hank Paulson came to his position from Goldman-Sachs).

Finally, there's the simple consequence of people in need. The idea of those under great economic duress (the newly-unemployed, the under-employed, those holding under-water mortgages or even under eviction, etc.) watching "their" money (as taxes) flow to the already-wealthy (banks) is galling to many, no matter how it works out.
posted by IAmBroom at 6:40 AM on October 20, 2011 [1 favorite]


The fed has a dual mandate: full employment and stable prices. By all accounts they have completely ignored the full employment mandate and have focused on (what is historically) extremely low inflation, when in fact a higher, but stable, inflation target would help resolve current problems and improve the employment situation. They also could be trying a lot more things than they have done. Many would suggest that this is because of their cozy relationship with "Wall Street" and their regulatory capture. In more general terms this is reflective of the way in which government has been willing to spend and act to help the financial services industry (i.e. TARP was a smart, but enormous investment), but not been willing to spend and act to help "Main Street" with the employment situation.
posted by idb at 6:45 AM on October 20, 2011 [2 favorites]


Some of the anger directed at the Fed was captured in this little cartoon (which is largely responsible for me prepending 'the' to things that do not need it).
posted by jquinby at 6:47 AM on October 20, 2011 [1 favorite]


Best answer: I'm going to start from scratch here.

There are several very different reasons that people are mad at the Fed.

1. Some people want to return to the gold standard. They think that having a central bank control the money supply is inherently an act of unsustainable fiction. This view is opposed by the vast majority of trained economists who understand that modern central banking is critical to maintaining a functioning economy.

2. Many people think that "weak dollar" is bad in the same way that "weak muscles" would be bad. That is a misunderstanding. "Weak dollar" means that it is easier for people from other countries to buy American products and it is more expensive for Americans to buy products made in other countries. Thus a weak dollar is a very good thing if you want to increase exports, decrease imports, and strengthen the U.S. economy. To the extent that Fed actions have weakened the dollar, this general aversion to weakness makes people dislike the Fed.

3. The Fed is taking steps to help the U.S. economy. Some Republicans don't want the economy to improve until after the 2012 Presidential election, and so they are trying to pressure the Fed to stop taking these steps.

4. The Fed has a dual mandate: to minimize inflation and maximize employment. These goals are generally in opposition to each other. Some economists think that the Fed has done too much to raise employment and thereby risked increasing inflation. The majority of economists believe that there is little risk of inflation at this time, and that the unemployment rate is still too high. Some in the latter group (e.g. Krugman) are mad at the Fed for not being more aggressive at increasing employment.

5. The Fed is supposed to be an insulated non-political institution. Every word that comes out of the Fed and its members is carefully parsed and can have a huge impact on American finance. It's not an exaggeration to say that a single misplaced word from the mouth of Ben Bernanke could quickly lead to tens of billions of dollars of lost. For this reason, politicians historically do not attack the Fed and the Fed does not engage in political rhetoric. At this point in time some opportunistic politicians have been attacking the Fed. Ben Bernanke has not responded and not defended the Fed because that's not his job and it's dangerous for him or other members of the Fed to get mixed up in that sort of thing.

There's a lot more and I'm probably missing some major points, but that should give you some idea. It is beyond the scope of this answer to say which of the five points above constitute appropriate reasons for anger and which don't.
posted by alms at 6:55 AM on October 20, 2011 [24 favorites]


The fed has a dual mandate: full employment and stable prices. By all accounts they have completely ignored the full employment mandate and have focused on (what is historically) extremely low inflation, when in fact a higher, but stable, inflation target would help resolve current problems and improve the employment situation.

But the fed can only stimulate employment by increasing the money supply. Have you looked at interest rates lately? Its doing everything it possibly can to create inflation and hopefully the attendent economic growth. The value of a publically announced target is a point for debate, but I don't see how you can possibly argue the Fed has not been pursing an extremely expansionary monetary policy.

The Fed is not what the ECB is and what the Bundesbank was - far too obsessed with price stability.
posted by JPD at 6:56 AM on October 20, 2011


Monetary policy changes could yet accomplish some things. The Fed could continue to buy financial assets for cash. To be fair, the focus on the Fed is also because the primary branches of government have utterly failed the middle and working classes. A combination of fiscal and monetary policy would probably be the best bet.
posted by idb at 7:14 AM on October 20, 2011


I can't speak for why everyone who is "mad at the Fed" is mad at the Fed. But judging by some of my weirder facebook friends, I'll say this:

1. I know some people who have latched onto Ron Paul, mostly because he supports legalizing pot. And may have been infected by his other wacky and fun ideas, like shutting down the Fed.

2. It is especially bizarre to see peace-and-love hippies linking to stuff that's straight out of the John Birch Society, but I have. I get the impression that when people who are prone to believe Weird Things (the Mayapocalypse, JFK assassination conspiracy theories, etc) start thinking about and sympathizing with the current 99% movement, they wind up reading weird conspiracy-theorist crap that has been around for a while that calls for, among other things, shutting down the Fed.

In short, I chalk it up in those cases to excess credulity and bad sources of information.
posted by adamrice at 7:23 AM on October 20, 2011 [1 favorite]


It is especially bizarre to see peace-and-love hippies linking to stuff that's straight out of the John Birch Society

Not if you've read the Illuminatus! trilogy.

The far-left is just as fond of conspiracy theories as the far-right.
posted by empath at 7:37 AM on October 20, 2011


Why are people mad at the Fed?

Because they're misinformed.
posted by incessant at 7:41 AM on October 20, 2011 [2 favorites]


Nonetheless, as an organization it smacks uncomfortably of unchecked paternalism. And am I correct in perceiving that money can be—and has been—printed and put into circulation.

Controlling the money supply is one part of what the Fed does. I posted a list of things that the Fed does in a previous comment . Modern governments (almost) always control access to money to try to keep their economies stable. With the US, it's through the Fed controlling the basic interest rates on borrowing dollars. They make dollars cheap to borrow when the economy is slowing down to help promote growth rather than an extended recession, and they make dollars expensive to borrow when the economy is overheating to avoid a massive bubble and huge crash. This is not perfect of course, but the principles were developed in response to other economic policies that did not work as well (such as counting on government spending to be the only way to stimulate the economy).

If you want to see a good example of a country lacking this kind of control and the havoc it can create, take a look at the current situation with Greece and the Euro. Greece's economy is underperforming in relation to other countries in the European region, and if they controlled their own currency the conventional wisdom would be for them to stimulate the economy by reducing interest rates, in much the same way that the Fed has been reducing interest rates to near 0 during the current recession in the US. Instead, Greece has been given stop-gap bailout money in exchange for enacting austerity measures (i.e. more taxes and less government spending). This plan has pretty much no hope of stimulating the Greek economy so that they can get back on track, because the bailout money is only being used to pay off debts and the austerity measures actually make it harder for Greece to keep their economy going.

Now it's definitely reasonable to say that the Fed could have better economic policies or could be run in a more transparent way. But given the recent and totally unnecessary brinkmanship in Congress over raising the debt ceiling, I don't think it would be a great idea to give Congress direct control over the big lever that controls the economy (interest rates). Most of the people who say that the Fed should be abolished or otherwise criticize it don't really have a strong background in macroeconomic policies, and I haven't heard any suggestions for reasonable alternatives (a return to the gold standard is mentioned a lot, and that is completely infeasible for reasons I won't get into here).

(There seemed to have really been a lot of new money being used in Iraq and Afghanistan. In suitcases, et al.)

This is a completely different issue altogether. The Defense Department gets an absolutely enormous share of tax revenue, which they use on things like Predator drones and paying off warlords in Afghanistan. It has nothing to do with the Fed or economic policies.
posted by burnmp3s at 8:09 AM on October 20, 2011


The Fed doesn't print money. They create money via fractional reserve banking, just like any other bank creates money.

Of course the Fed prints money. It buys government securities using money generated from...nowhere. Explanation.
posted by massysett at 8:10 AM on October 20, 2011 [2 favorites]


The person to start with here is Congressman Ron Paul, leading Fed critic. Book.
posted by massysett at 8:12 AM on October 20, 2011


This has been enlightening regarding the Fed and other aspects of the American economy and banking system. I'm not all the way through it yet, and I'm still trying to verify the accuracy of everything presented, but so far it seems legit:

The Economic Elite vs The People of the United States of America


posted by buckaroo_benzai at 8:24 AM on October 20, 2011


Somewhat simplified answer:

"Wall Street" made a lot of money during the run up of the housing bubble, ignorning sound lending practices and giving loans to people that could not conceivably pay them back, and selling bundles of these loans as securities to investors including pension funds. These securities turned out to be nowhere near as creditworthy as they were touted.

The Federal Reserve, a supposed regulator of the banking system, did absolutely nothing to even comment negatively on the situation as it developed, let alone regulate it. Both Greenspan and Bernanke effectively cheered the bubble on.

Effectively, the world housing market turned into a ponzi scheme, eventually ran out of greater fools and then the game of musical chairs stopped. Many of the banks suddenly found themselves stuffed to the gills with poor quality loans that they could no longer sell on.

Instead, of letting the banks suffer the losses of their poor lending decisions, as one would normally expect in system of 'capitalism', Fed chairman Bernanke and Sec. Treas. Paulson instead threatened congress with 'tanks in the streets' unless they authorized a giant slush fund/revolving credit facility (TARP) to be created to bail out the banks. TARP was funded from the U.S. Treasury, aka, taxpayers.

At no point that I'm aware did the Federal Reserve contemplate, let alone even suggest, that the CEO's of banks who had earned millions/billions in bonuses during the build up of the bubble return any part of thoses bonuses to the struggling balance sheets of their companies. 'Capitalism' became 'Heads I win, tails the taxpayers lose' or 'Privatized Profits, Socialized Losses' crony capitalism.

One thing I don't understand is that with $800 billion in funds to throw at the banking system, why bailout the imprudent? Why not instead set up 8 new $100 billion dollar banks, or 80 new $10 billion dollar banks, higher back all the employees and let the top management twist in the wind?

In addition to TARP, the Fed enacted a slew of other very favorable (to the banks) lending programs that took in all kinds of, well, crap loans as collateral and loaned against them at or near par value.

Recently the Federal Reserve balance sheet had ~2 trillion (with a T) in mortgage backed securities on it, securities that were purchased from banks with funds that ultimately are the taxpayers.

At what price were those 2 trillion in securities bought at? We don't know. Are those securities continuing to perform with regular interest payments? We don't know. What are those securities worth currently? We don't know. Do the security trusts even have the actual right to foreclose on the underlying properties, or is the chain of title broken which prevents legal foreclosures (google up 'robosigning') to recover collateral. We don't know. The Federal Reserve, supposedly under a new era of 'openness' as pronounced by Bernanke, refuses to disclose those details. Any drop in value, or non-performance, of those securities feeds right back to the US Treasury and thus hits taxpayers.

On another front, while Bernanke and Treas. Sec. Geithner have glibly mouthed "we have a strong dollar policy" over and over, the value of the dollar has fallen ~25% versus other major currencies since the crisis (driving oil prices up), perhaps as a result of the serial "Quantitative Easing" programs.

In addition, it is strongly suspected that the shower of liquidity that the Fed has rained upon the banking system through QE and other loan programs did not go into loans to business/individuals but instead went into commodity speculation, driving up not just gas, but *FOOD* prices as well. There is speculation that Federal Reserve policies are directly responsible for touching off the 'Arab Spring' due to driving up world food prices beyond could be aborbed by many of the poorer citizens of Egypt and other countries.
posted by de void at 9:36 AM on October 20, 2011 [4 favorites]


'...higher back all the employees...' should be 'hire back all the employees', duh.
posted by de void at 9:38 AM on October 20, 2011


Money is not printed "out of thin air"; every dollar printed is backed by some form of security

And what happens if that security, whether it be sovereign debt or now mortgage-backed securities, loses value?

In answer to the OP's original question of why people are mad at the Fed, as has been mentioned Ron Paul is one of the main proponents of the Fed-hate. He's written extensively about it, and you can either check out the book linked to above, or browse through some of his writings which are available free online.
posted by losvedir at 9:51 AM on October 20, 2011


Oh, one other thing - the Fed's policy of effectively zero-interest rates for a 'sustained period' has imposed a stark choice on those people who were previously living on their savings (e.g., elderly living on interest that they used to get from Certificates of Deposit) - either accept a complete decimation of their income or put their capital in high risk vehicles (corporate junk bonds and their ilk) in order to continue their standard of living.
posted by de void at 10:54 AM on October 20, 2011


I am not in a position to judge it critically, but I found this part of a TAL episode on how the fed works fascinating.
posted by janerica at 10:56 AM on October 20, 2011 [1 favorite]


Mike Mongo wrote: Where is the checks and balances? Where's the transparency? Am I understanding these issues correctly? Amazingly, this is all new to be me as a consequence of Occupy Wall Street. So, what gives with the Fed?

The balance against the Fed is that the President nominates people to serve on its Board of Governors, with the Senate confirming their appointment.

People often get pissed off at/scared of the Fed because they don't understand how it works or what it really does. Even some people who do have a basic understanding of the Fed's authority don't grasp that in our present economic situation, there's little that can be done from the monetary side of things. It's like pushing on a string. Suffice it to say that, here in the real world, there are good technical reasons for most of what the Fed does, but many of those reasons aren't really understandable without some study of economics, unlike aspects of their work like controlling interest rates in normal times, which most everybody can grok without specialized knowledge.

Incidentally, a lot of the things they've been taking flak about lately is related to that one thing: control of interest rates.

Take this thread for example, de void says that the money to buy securities from the banks came from the taxpayer. That's not actually true. TARP did, because it was a Treasury program. The Fed literally created the "money" (I say money, but to the Fed it's all just numbers in an account, there is no there there) to buy that stuff out of thin air. It gets to do that, being the central bank.

And before anyone goes crazy over that, do keep in mind that the profits from the Fed's operations get turned over to the Treasury periodically, just like the profit from operating the mint does. (except the mint is run by Treasury)

If you regularly read some of the more popular economics blogs, you'll pick up the necessary concepts over the course of a few months as a consequence of learning to understand the various things they're talking about. It provides some sense of direction for your own learning, along with occasional education coming directly from your daily reading material. Later on, you may come to realize that about half of them are completely full of shit because they still haven't adjusted to the reality of not being on the gold standard anymore, but that's OK, they'll still have done you a great service in teaching you the basics. None of that has really changed.

Do keep in mind that economics has become very politicized (much like climate change), so there's a lot of bunk out there, but it doesn't hurt to understand where it comes from.
posted by wierdo at 10:57 AM on October 20, 2011


...de void says that the money to buy securities from the banks came from the taxpayer. That's not actually true...

True, I did not phrase that well. The treasury may not have been the source of the funds to buy/lend against those MBS's on the Fed's balance sheet, but the treasury/taxpayers are on the hook if the MBS's don't perform lose/value:

http://seekingalpha.com/article/71792-size-of-fed-s-balance-sheet-limits-public-s-losses

(my emphasis added):

...if the Fed uses the cash (directly or indirectly) to buy or lend against market-shunned securities, then the Treasury is only made whole if those securities perform, or the loans against them are repaid. If the market is irrationally shunning these securities, then the Treasury will eventually break even. But if the securities turn out to be worth less than what the Fed lends or pays, taxpayers might be forced to eat the loss. ...

...Whether Fed's balance sheet should be expanded is an investment decision — should the public throw more money at the project that the Fed is undertaking? There's a real downside — losses by the Fed will eventually be borne either by taxpayers or by owners of dollar denominated assets (which means especially workers with little bargaining power, whose wages are negotiated in nominal dollars and would not rise with inflation). ...
posted by de void at 11:09 AM on October 20, 2011


massysett: "Of course the Fed prints money. It buys government securities using money generated from...nowhere."

What I took from the comment you responded is that the Fed does not literally print money. The Bureau of Printing and Engraving, a part of the Department of the Treasury, actually prints the notes. As you noted, the Fed doesn't have to print anything. When it purchases a security, it can simply make entries on its balance sheet and adjust the balances of the selling bank, and money has been created.
posted by lex mercatoria at 11:19 AM on October 20, 2011 [1 favorite]


Except that Treasury is only on the hook if Treasury decides it should give the Fed some money for some incomprehensible reason. It is true that we all "pay" in the sense that in theory-world our dollars are slightly devalued because of the increase in money stock, here in the real world that's not actually what happened.

This may be a bit much for an AskMe, but to explain further, those assets were previously being used as money, they were as good as money (since any bank would take them as collateral at par, just like a dollar bill), so they may as well have been money. When they stopped circulating as money, that acted to shrink the apparent supply of money, thus (theoretically) increasing the value of all other dollars. By accepting said assets at par as collateral for loans to banks, the Fed essentially put it the same amount of money back in circulation, leaving zero net change in the money supply.

The point being that the money didn't come from you or I or the US Treasury, nor will the US Treasury have to pay the Fed for losses on these securities.

Oh, and Mike Mongo, for what it's worth, the Fed doesn't print physical money, they pay the Bureau of Engraving and Printing to do it for them.

..aaand beaten to it by lex mercatoria.
posted by wierdo at 11:22 AM on October 20, 2011 [1 favorite]


Can you provide a recent example of someone being "mad at the Fed"?

Newt Gingrich and Ron Paul in the Republican presidential debate on October 11, 2001:
GINGRICH: I think there -- virtually every American has a reason to be angry. I think virtually every American has a reason to be worried. ...

If [Occupy Wall Street protesters] want to really change things, the first person to fire is Bernanke, who is a disastrous chairman of the Federal Reserve. Everybody -- everybody in the media who wants to go after the business community ought to start by going after the politicians who have been at the heart of the sickness which is weakening this country and ought to start with Bernanke, who has still not been exposed for the hundreds of billions of dollars.

And I'm going to say one last thing. I want to repeat this. Bernanke has in secret spent hundreds of billions of dollars bailing out one group and not bailing out another group. I don't see anybody in the news media demanding the kind of transparency at the Fed that you would demand of every other aspect of the federal government. And I think it is corrupt and it is wrong for one man to have that kind of secret power.

TUMULTY: So, Congressman Paul, where you come down on this?

PAUL: One thing I might -- might say is, we have made some inroads on the Federal Reserve. We passed a bill last year. We got a partial, you know, audit of the Fed. We've learned a whole lot. They were dealing in $15 trillion; $5 trillion went overseas to bail out foreign banks.

But you know what? Congress did a lot. I've worked on it for a good many years. But Bloomberg helped and Fox helped. They had court cases, Freedom of Information Act. And there are some even at this table who didn't think auditing the Fed was such a good idea, that we could call up the Fed and ask them and they would tell us what they're doing. I've been calling them up for 30 years and they never tell me.

But we're getting to the bottom of it. But if you want to understand why we have a problem, you have to understand the Fed, because the cause comes from the business cycle. ... And the cause is the booms. When there are booms and they're artificial, whether it's the CRA or whether it's the Fed, easy credit, when you have bubbles, whether it's the Nasdaq or whether it's the housing bubbles, they burst. ...

PAUL [asking a question]: Since the Federal Reserve is the engine of inflation, creates the business cycle, produces are recessions and our depressions, the Federal Reserve obviously is a very important issue. And fortunately, tonight we have a former director of the Federal Reserve at Kansas City. So I have a question for Mr. Cain.

Mr. Cain, in the past you have been rather critical of any of us who would want to audit the Fed. You have said -- you've used pretty strong terms, that we were ignorant and that we didn't know what we are doing, and therefore, there was no need for an audit anyway, because if you had one, you're not going to find out anything, because everybody knows everything about the Fed.

But now that we have found and we have gotten an audit, we have found out an awful lot on how special businesses get bailed out -- Wall Street, the banks, and special companies, foreign governments. And you said that you advise those of us who were concerned, and you belittled -- you say call up the Federal Reserve and just ask them. Do you still stick by this, that that this is frivolous, or do you think it's very important? Sixty-four percent of the American people want a full audit of the Fed on a regular basis.

CAIN: ... when I served on the board of the Federal Reserve in the 1990s, we didn't do any of the things that this Federal Reserve is doing. I don't agree with the actions of this Federal Reserve. I don't agree with the actions that have been undertaken by Ben Bernanke. We didn't have a $14 trillion national debt to prop up with some of the actions that they're taking.
posted by John Cohen at 11:28 AM on October 20, 2011


Not to belabor this wierdo, but....

So the Fed is only a 'ratchet' for interest payments between it and the treasury, meaning that although they remit interest to the treasury when they earn it, there's no other mechanism the other way? The Fed absorbs all losses in its balance sheet itself, or creates new money to cover losses?*

If the Fed suffers a 5% loss on that 2 trillion MBS portfolio, well, ok, no problem, they'll just create $100 billion in new money to cover it.

Of course, there's also the question of whether the Fed is breaking the Federal Reserve Act Section 14 by owning MBS that aren't directly backed by a US Agency:

To buy and sell in the open market .... any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States

But what's another little rule bending in the grand scheme of things?

* as an aside, I find the semantic 'see no evil' game on the phrase 'the Fed doesn't *PRINT* money' amusing. Whether someone prints up a pile of cash and gives it to me, or simply electronically adds a couple of zeroes to my bank balance, the net effect is the same.
posted by de void at 11:49 AM on October 20, 2011 [1 favorite]


Why would they create new money to cover their losses? They already created the money to buy (or lend against) the securities. The only reason the securities (should) matter at all to the Fed is that they can later sell them, thereby tightening the money supply at that later date.
posted by wierdo at 1:55 PM on October 20, 2011


Because the Fed loaned (at 0% interest, most not repaid) out Sixteen Trillion dollars with basically no oversight.

When you find Ron Paul and Bernie Sanders on the same site of an issue, something's definitely up.
posted by DaveP at 4:52 PM on October 20, 2011 [2 favorites]


> Newt Gingrich and Ron Paul in the Republican presidential debate on October 11, 2001:

A link would've been sufficient.
posted by dgeiser13 at 5:27 AM on October 21, 2011


This Matt Taibbi book explained the whole banking crisis/real estate crisis (and how the Fed was a major direct cause) better than anything else I've ever read.
posted by getawaysticks at 6:46 AM on October 21, 2011


> Newt Gingrich and Ron Paul in the Republican presidential debate on October 11, 2001:

A link would've been sufficient.


First of all, to correct myself, I of course meant 2011, not 2001. Second, a link to the entire debate transcript would not have been sufficient. Almost one would take the trouble to read through the transcript hoping to find what I was alluding to.
posted by John Cohen at 1:15 PM on November 2, 2011 [2 favorites]


Almost no one, that is.
posted by John Cohen at 1:15 PM on November 2, 2011


DaveP wrote: Because the Fed loaned (at 0% interest, most not repaid) out Sixteen Trillion dollars with basically no oversight.

I know I'm late in replying, but that's kinda the point of central banks. To be the lender of last resort. It's what makes the fractional reserve system work.
posted by wierdo at 2:03 PM on November 2, 2011


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