Federal Reserve: fact or conspiracy?

[Martinghoul]

Quote from MarketMasher:
"Fed has been lax in dealing with the bubble". How about the dot.com bubble? How about the S&L? Do you think the Fed needs some external input into their groupthink mentality or that they have been functioning fine "as is"?

Well, now we're blaming the Fed for all the world's ills. As long as we're doing that, why don't we also give them credit for Volcker? I am all for good external input, I just don't really know where to find it. Do you think politicians are where it's at? Personally, I strongly disagree.

"The Fed has been audited, in a variety of creative ways."

Not sure what you mean by "creative" - maybe you can elaborate.
Your statement that the Fed is apolitical is stated as a tautology - it is because it is. Logically, your position would be to have an open and clear audit of the Fed to provide supporting data that it has not been influenced politically in any way. Is that correct?

The subject of financial audits has been discussed a lot. I think contemporaneous audits of Fed monetary policy by Congress, of all people, are harmful. If you want to assess just how apolitical (or otherwise) the Fed is, detailed, meticulous transcripts of all FOMC meetings are available 5 years after the meetings take place. I have read quite a few of them, which is the basis for my judgment.

"Or are you comparing banks with normal corporates? "

It is they who are scaling their compensation to normal corporates when they should not be.

I don't know. I don't have a view on bank compensation vs non-financial corp compensation. I have a view that executive compensation without executive liability is a joke, but that applies equally to all.

 

[MarketMasher]

Quote from Martinghoul:

Well, now we're blaming the Fed for all the world's ills. As long as we're doing that, why don't we also give them credit for Volcker? I am all for good external input, I just don't really know where to find it. Do you think politicians are where it's at? Personally, I strongly disagree.

The subject of financial audits has been discussed a lot. I think contemporaneous audits of Fed monetary policy by Congress, of all people, are harmful. If you want to assess just how apolitical (or otherwise) the Fed is, detailed, meticulous transcripts of all FOMC meetings are available 5 years after the meetings take place. I have read quite a few of them, which is the basis for my judgment.

I don't know. I don't have a view on bank compensation vs non-financial corp compensation. I have a view that executive compensation without executive liability is a joke, but that applies equally to all.

Your answer implies that the Fed mechanism is not sufficient "as is", but your thought process stops there. No offense, but that is called "lazy thinking". How about a mandatory meeting between scheduled FOMC meetings with all the voting board members but would include "outsiders" like Roubini, Taleb, Tavakoli , etc where the minutes are recorded and released? The opinions presented would provide a sounding-board to Fed decisions.

The size of compensation is a reflection of what is declared as "profitability". If the member banks have the unfair advantage of more easily declaring "profits" via cheap money, and they are aided in that by the CB, then when those profits flow to lobbying, the Fed is circuitously drawing from the taxpayer to fund special interest without the approval of the citizens.

 

[Martinghoul]

Quote from Maverick74:
There is no point to debating whether or not there is a conspiracy, the fact of the matter is there is no real reason to have a federal reserve bank except to serve the goals of the politicians. You cannot support a free market and the fed at the same time. As long as we have a federal reserve bank we do not have a free market.

Well, for its merits, free markets have flaws. Do you really really really want a completely free, totally unregulated mkt?

Every federal reserve bank that has come before before us has failed. What I am more interested in are the consequences of having a federal reserve bank. The consequences are boom and bust cycles that destroy the middle class of every society and inflate the rich.

Well, the historical record doesn't really agree with you... Historically, a lot of academic research has been done to demonstrate that boom and bust cycles were more severe without central banks. After all, that's what they're all about.

Do I think it's intentional? That is there is some world order at work here? I don't really care. We'll never know the answer to that. What we do have anecdotal evidence of are the consequences of central banking. And the results are terrible.

What are these results? Can you pls provide an example?

Free markets need to know the true value of money in order to survive. They need true price discovery. Without price discovery the markets will never function the way they are suppose to.

Well, I would like to know how you intend to deal with the issue of price discovery/value of money in whatever alternative system you might wish to propose.

 

[Maverick74]

Quote from Martinghoul:

Well, for its merits, free markets have flaws. Do you really really really want a completely free, totally unregulated mkt?

Well, the historical record doesn't really agree with you... Historically, a lot of academic research has been done to demonstrate that boom and bust cycles were more severe without central banks. After all, that's what they're all about.

What are these results? Can you pls provide an example?

Well, I would like to know how you intend to deal with the issue of price discovery/value of money in whatever alternative system you might wish to propose.

I'm going to quote Ron Paul from this link since I'm not going to be able to put any better then him.

Today, the Federal Reserve's duties fall into four general areas:

• conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

• supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers

• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system[1]

Of these four stated goals, the first is the most expansive in its scope. Let us leave it until last. The second, to ensure the soundness of the banking system, seems to have been answered by history. Since the Fed’s launch in 1914, the nation has suffered banking crises in every generation that have dwarfed the Panic of 1907 or any of its predecessors. In addressing the Great Depression, the Savings and Loan Crisis, and the 2008 Meltdown, the Federal Reserve’s only answer has been, “Without the Fed, it would have been much worse.” History is not on the Fed’s side. Only a general ignorance of the facts allows them to the Fed to keep fooling most of the people most of the time.

Refuting the third stated goal is so easy it’s almost embarrassing. For those not trying to regain their seats after falling on the floor laughing, I need only to point out 30-1 leveraging, $60 trillion (or more?) in derivatives [2], or the subprime mortgage disaster. I believe that to go any farther would be, to borrow a football analogy, "piling on".

In fact, Alan Greesnpan's now famous (or infamous) mea culpa on the "flaw" in his beliefs about the self-regulating nature of financial markets effectively amounts to the Fed admitting that it has failed in goals three and four. If the "Maestro" himself doesn't speak for the Federal Reserve, then who does?

Regarding that fourth goal, one is tempted to give this one to the Fed. The important objection would be of the "should they" rather than of the "can they" variety. The fact that the Fed provides these services with an exclusive monopoly and claims only that it will play a “major role," rather than a positive one, makes this the least significant of the four.

That leaves the first goal, which is stable prices, full employment, and moderate long term interest rates. There can be no doubt that the promises of stable prices and full employment in particular are now the principle justifications for the existence of the Federal Reserve. Almost exclusively, when the subject of the Fed comes up, these two goals are discussed. Even the Fed chairmen themselves, when testifying before Congress, often state these two goals exclusively in describing the Fed's overall mission.

It should not be forgotten that until the late 1970's, full employment was not part of the Fed's mandate. Even using the logic of central banking proponents, these two goals are mutually exclusive of one another. Since the only means the Fed has at its disposal to try to achieve full employment is expansion of the supply of money and credit, which puts upward pressure on prices, the Fed must balance these two goals to try to find the optimum level of money and credit where everyone is employed but prices remain stable.

Ironically, the best source of information on the Fed's performance in terms of its principle goal for the first sixty years of its existence (price stability) is the Fed itself. Among the collections of historical data on the Federal Reserve of Minneapolis website, there can be found a table documenting price inflation rates for every year since 1800 (Appendix A of this article). There, one can see for oneself whether or not the Fed provided price stability during any period in its existence.

The first fact that jumps off of the page is the stark difference in the trends before and after the creation of the Fed. For the period from 1800-1913, the general price level (a statistic that Austrian economists object to) was cut almost in half. In other words, products that on average cost $100.00 in 1800 would only cost $58.10 in 1913 (Appendix A). While there were some years where prices rose, prices generally fell overall during the entire 19th century.

This would probably be a startling revelation to most modern Americans. There isn't an American alive whose parents or grandparents haven't remarked at current price levels and gone on to say, "When I was your age, I only paid a dime for that." As unbelievable as it might seem, that conversation would have been exactly the opposite in 1890. Grandpa would instead be saying, "When I was your age, I had to pay a lot more for that." Today, Americans resign themselves to constantly rising prices as a fact of life. However, that is a phenomenon that has only occurred since the creation of the Fed.

In contrast to the century preceding the Fed, the century following has seen exactly the opposite result. Those same products whose average price had fallen from $100.00 in 1800 to $58.10 in 1913 rose to $1,265.14 in 2008. That is an increase of over 2,000%!

Without addressing the subject of which result is "better for society," inflation or deflation, the data speak directly to the question of "price stability." From 1800-1913, the average annual fluctuation in price was 3.4%. From 1914-2008, the average annual fluctuation in price was 4.5%, a 33% increase over the previous period. In fact, the numbers for the Fed would be far worse if the same methods used to calculate the price inflation rate were used for the entire period from 1914-2008. In the 1990’s, several changes were made to the methodology used to calculate the Consumer Price Index. They all have the effect of lowering the price inflation rate given a particular set of price data.

Regarding the goal of "full employment," the Fed's results are also poor. Similar to that of the CPI, the methodology for calculating the unemployment rate was also changed in the 1990's. These changes in methodology, which include no longer counting "discouraged workers," lower the unemployment rate from what it would be for the same data if calculated using the old methodology. Despite this handicap, the Fed still fails to achieve positive results. The average annual unemployment rate in the U.S. between 1948 and 1978 was 5.1% (see Appendix B). Even without compensating for the changes in methodology during the 1990’s, the average annual unemployment rate in the U.S. between 1979 and 2009 was 6.1%. So, unemployment was almost 20% higher during the period that the Fed actively tried to manage it than it was during the prior 30 years.

Once you undo the methodological changes in calculating price inflation and unemployment that were put in place in the 1990’s, the Fed’s results on price stability and unemployment get much uglier. Nevertheless, even after the Fed fudges its own numbers it still comes out a failure. Everyone can remember the ne’er-do-well from school that cheated on tests and still couldn’t pass. Would we want that kid managing the entire economy?

The full article is here:

http://www.dailypaul.com/node/123038

 

[heypa]

Well La Ti Da. As an uninformed outsider I think the FED has done a fantastic job since its inception. It has (Using the government false figures' CPI') succeeded in reducing the value of the Dollar to about 1% of its value since it began in 1913. Thanks Woodrow!
How's that for a store of value? Each yearly loss comes out of the pockets of the people that save money or own anything of value.

 

[Anaconda]

Quote from Hello:

My goal here was to dispel the myths that these institutions were being controlled behind the scenes.

They have shareholders. Almost all of which are recipients of the discount window and then some.

 

[Daal]

Quote from Maverick74:

I'm talking about restraint. New money has to have collateral behind it. Not for the sake of trust, but to impose limits on the velocity of supply.

There is no restraint in a gold standard due the fact that the gold standard can be changed at any time by a decision of the government, it happened many times particularly during war. Furthermore it wouldn't be just about inflation, during the 19th century debt levels were much lower than during the 20th/21th century, therefore the deflation would have negative effects that did not exist back then

 

[Hello]

Quote from indahook:

Fact or conspiracy is irrelevent.

The federal reserve creates booms and busts via rate manipulation and money supply. That much we ALL know for sure.

Just shut up and game it....

I can assure you i game the system for huge dollars, and most likely more than you do, the fact of the matter is that the fed does not create booms nor do they create busts, they respond to them, this is another terrible misconception of how central banking actually works.

The only thing you could say which might back your brutal argument is that greenspan flooded the market with dollars during the tech bubble, regardless of him, central bankers(as a whole) do their job.

If anything the onlything you could blame greenspand and bernankie for was being complacent, they are not the cause, they are the effect.

 

[jem]

hello, i normally respect your contributions... but...

lets review what the fed did during the housing boom.

As prices went up dramatically they loosened lending standards.

We saw 80/20s- 100 percent loans, then alt a, then no doc, no income, subprime. 125 loan to value.

The fed help amplify the boom and now standards tighten during the bust.


The exact opposite of what they should be doing.

It can be argued the entire boom was engineered by Greenspan.

The fed intended to create a real estate boom to replace the nasdaq boom.

 

[Hello]

Ok we could say greenspan was a contributor, and he probably was a large contributor, my argument is that he wasnt the direct cause of the housing bubble, he reacted poorly, i have already said that, but it would have happened twice as bad if the government had control as opposed to central bankers, yes greenspan threw fuel on the fire, but that was not something that he intended to do, if anything bernanke should have stopped it in 06.

Im not arguing that what they did was right, infact they made completely the wrong move, im telling people that the fed doesnt intentionally create booms and busts...... it may not seem like they dont because greensapan was the biggest idiot ever, but I cn assure you it doesnt do any of those guys any good to create a volatile scenario. I can assure you my own dad was not in on some sort of manufactured scam by the central banks orchestrated by the rothchilds, to bring in more money to the central banking institution, if he was maybe we would have ended up rich......


I agree with you 100% that they made the wrong move and that greenspan was an idiot, but they did not intentionally manufacture it, nor were they the number one cause of it.

And thank you for respecting my opinion MOST of the time

Quote from jem:

hello, i normally respect your contributions... but...

lets review what the fed did during the housing boom.

As prices went up dramatically they loosened lending standards.

We saw 80, 20s. 100 percent loans, then alt a, then no doc, no income subprime. 125 loan to value.

There is no way in the world anyone can say the Fed moderates booms and busts..

They allowed banks to loosen during the boom and now they tighten standards during the bust.

The exact opposite of what they should be doing.

It can be argued the entire boom was engineered by Greenspan if you go back and look at the history.

They intended to create a real estate boom to replaced the nasdaq boom.