The Federal Reserve is the central banking system of the United States. A series of financial panics, the worst being the Knickerbocker Crisis of 1907, during which the New York Stock Exchange fell over 50%, convinced Congress that it could not fulfill its constitutionally mandated authority of maintaining a stable and sound currency. So, on December 23, 1913, Congress created the Federal Reserve Bank, a federally chartered but private bank.

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The Federal Reserve Bank was created with three clear mandates: stable employment, stable prices, and moderate long-term interest rates. Over the years, its role has grown to include conducting the nation’s monetary policy, regulating banking institutions, and maintaining the stability of the financial system. Appointed by the President, the Chairman and Board of Governors, along with twelve regional Federal Reserve Bank presidents, set the policy.

This structure is unique amongst the world’s central banks. The Federal Reserve’s monetary policy and all of its decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government. The Federal Reserve does not receive its funding from Congress. Instead, it is self-funded by its member banks and other profit making endeavors. It is truly independent.

The United States Treasury Department creates the currency that the Federal Reserve regulates. This is also unique amongst the world’s governments. It is a system of checks and balances to prevent the Federal Reserve from manipulating the nation’s money supply, in good times or in bad.

Unless times get real bad. As they did in 2008.

To deal with the fallout from from the global financial crisis in 2007-2008, the Federal Reserve instituted a program called Quantitative Easing (QE). This is a rarely used monetary policy to stimulate the economy. The Federal Reserve bought specified amounts of financial assets from commercial banks and other private institutions. This raised the price of those assets and lowered their yield, while also increasing the money supply.

According to the International Monetary Fund, QE has mitigated the adverse effects from the crisis. However QE has not been without its detractors, which have named the following risks:

SAVINGS

By artificially keeping interest rates low, possibly even below the rate of inflation, investors face the decline of the real value of their savings over the next several years. The resulting desire for higher returns will force a flight into more risky investments.

HOUSING MARKET EXCESS

Over purchasing mortgage backed securities might result in an excess supply of new housing.

WEALTH INEQUALITY

In May 2013, Federal Reserve Bank of Dallas President Richard Fisher said that cheap money has made rich people richer, but has not done quite as much for working Americans. Most of the financial assets in America are owned by the wealthiest 5% of Americans. According to Federal data, the top 5% own 60% of the nation’s individually held financial assets. They own 82% of individually held stocks and over 90% of individually held bonds.

INFLATION

Inflation may increase if the Federal Reserve overestimates the easing required and creates too much money by purchasing liquid assets. If banks remain reluctant to lend this new money to qualifying businesses and households, this measure may still fail to increase purchasing demand and power.

PRINTING MONEY

In 2010 Richard W. Fisher, President of the Federal Reserve Bank of Dallas, warned that QE carries “the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields at a time of persistent budget deficits, concern about debt monetization quickly arises.” Later in the same speech, Fisher stated that the Fed is monetizing the government debt. “The math of this new exercise is readily transparent. The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.” Embarking on this path can be the last desperate measure of any great economy.

CAPITAL FLIGHT

Banks might use the new “printed” money to invest in emerging global markets, commodity-based ventures, commodities themselves, and other riskier opportunities. They may not lend to local businesses that are having trouble obtaining loans and funding.

 

The Federal Reserve has taken all of the above risks into consideration and believe that they have been mitigated and Quantitative Easing is necessary to place our economy back on a sound footing.

As for the specific risk of the "new money" being used to invest in "other more risky opportunities", the Federal Reserve does not agree with this being a potential area of concern.

Rather this may be precisely what is needed to obtain the desired effect.

Great risk always presents great opportunity.

 

2015 © QUENTIN BRENT

Please note the content on these pages are works of FICTION.
All material is a part of the website quentinbrent.com and is copyright owned by Quentin Brent.