Truths and Myths of the Federal Reserve


The Roosevelt Forward blog has the post Interview with Randall Wray: Truths and Myths of the Federal Reserve. It is a short article, and I will print a significant portion of it as an excerpt from it with my own emphasis added.

Bernanke had long argued that what Japan needed was “quantitative easing” to supplement the zero rate policy. He was always vague about what that means, but he had this idea that the Fed can “push on a string“-encourage banks to lend and borrowers to borrow by “pumping liquidity” into the economy. This would take the form of increasing bank excess reserves-providing them with far more reserves than they wanted to hold-on the belief they would then lend.
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Banks will not lend and borrowers will not borrow because they know we are in a deep and long recession.
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So to provide a more direct answer: the Fed can neither create nor cure recessions and crises. It can determine the overnight interest rate, and it can provide reserves on demand. It can also buy anything for sale simply by crediting reserves (a point Bernanke made in testimony before Congress). We used to think the Fed would never buy bad private assets-but Bernanke changed all that. However, only appropriate fiscal policy could have led to a quicker recovery. We did not get that.

LS: Of course, the inevitable next question has to be: who owns the Federal Reserve which issues the reserve currency of the world?

RW: The Fed is a creature of Congress, created in the 1913 Act, with subsequent legislation dictating functions and policies. In other words, it really is a branch of government, albeit an unusual one since there are private shareholders. Does the Fed cater to financial institutions? Yes, but so does the Treasury-and as we know, Goldman Sachs has been running the Treasury for the past three Presidencies-Clinton, Bush and Obama. I think that is of greater import than is Wall Street’s control of the Fed. Capture of regulators is nothing new. But it’s become more obvious and complete since Clinton, who essentially delivered Washington to Wall Street. Washington then deregulated finance, which responded by “Hoovering” up 40% of all US corporate profits. The triumvirate of Rubin, Greenspan and Summers led the charge, and then added Paulson, Geithner and Bernanke. Remarkably, only Greenspan’s reputation has suffered in the collapse-and of this team he was the only one who actually raised some doubts during the speculative bubbles that followed.

My thanks to Real Progressives for their valiant efforts to publicize this information in their Facebook post.

Wray knows that the “private shareholders” are more like paying passengers in a taxi. For the time that they are paying, they get to tell the taxi where to go, but they don’t own the taxi.

the Fed has expanded its balance sheet to $2 trillion.

For the sake of ease of calculation, let’s say that the $2 trillion is sitting as excess reserves of the private banks from which the Fed bought these “assets”. Let’s assume that the Fed pays 25 basis points (0.25%) in interest for letting private banks leave their excess reserves with the Fed. The private banks are earning $5 billion a year on their $2 trillion of excess reserves that they cannot find any productive use for. I think I could comfortably just retire on $5 billion a year. I wouldn’t even have to touch the $2 trillion nest egg, unless I got bored in retirement with nothing to do. Consider this Social Security for the banks.

By the way, if you read the short article and have trouble understanding most of what Wray says, then you cannot have an informed opinion about the economy, the national debt, banking regulation, or a whole host of other important topics. Now that you know what it is that you don’t know, get yourself educated before you make any statements that can be believed as informed opinion.

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