Federal Reserve
The Federal Reserve, through its power to raise and lower interest rates, exercises more influence over economic growth and the level of employment than any other government entity. That unusual role dates from the 1970s, when the executive branch and Congress pulled back from the use of fiscal tools — vast New Deal spending and targeted tax cuts — as a means of regulating prosperity.
The Federal Reserve, through its power to raise and lower interest rates, exercises more influence over economic growth and the level of employment than any other government entity. That unusual role dates from the 1970s, when the executive branch and Congress pulled back from the use of fiscal tools — vast New Deal spending and targeted tax cuts — as a means of regulating prosperity.
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President Woodrow Wilson signed the Federal Reserve Act on Dec. 23, 1913, creating a seven-member board of governors, including the Fed chairman, and 12 regional banks — a structure collectively known as the Federal Reserve System. The governors are appointed by the president and approved by Congress; the regional bank presidents are selected by leaders of their communities, particularly bankers.
Private banks controlled the flow of credit and thus interest rates in the late 19th and early 20th centuries, and farmers, the backbone of the populist movement, complained that the big Eastern banks often starved them of credit at critical moments. Populists called for direct access to credit, without the banks as intermediaries. That did not happen.
The Federal Reserve System was a compromise. The banks would remain the lenders to the public, but the Fed would control the supply of funds on which the banks depended to make loans. Injecting more money into the banking system put downward pressure on interest rates, while its opposite, restricting the supply of potential credit, pushed up rates. The regional banks were intended to help make the flow of credit even across the country.
Through various refinements over the years, this “open market” operation, as it was called, has been at the heart of the Fed’s power. The interest rate that results is called the federal funds rate. In turn, the interest that banks and other lenders charge for mortgages and for various forms of commercial and consumer credit fluctuate with the federal funds rate. As a supplement, to assure an even flow of available credit, commercial banks in various parts of the country can borrow directly from the Fed at the nearest regional bank, using the so-called discount window. The discount rate is linked to the federal funds rate.
The federal funds rate is set by the Fed’s Open Market Committee, composed of the chairman, currently Ben S. Bernanke, the six other governors, and five of the 12 regional bank presidents, on a rotating basis. The committee meets at Fed headquarters in Washington every six weeks or so.
The Fed’s chairman, currently Ben S. Bernanke and before him Alan Greenspan and Paul A. Volcker, dominates Open Market operations. Their main thrust has been to limit inflation, even at the risk of a recession — although they have cut rates when the nation seemed in danger of one, as the Bernanke Fed has recently done.
— Louis Uchitelle Oct. 12, 2007
Created 1913 after the big depression.
Fed Takes a $3 Trillion Gamble to Spur Lending: John M. Berry, Bloomberg 5 dec.2008
So far this year, the Fed has aggressively reduced its overnight lending rate target to only 1 percent, and it probably will trim it by another 50 basis points at a Dec. 15-16 Federal Open Market Committee meeting.
Balance Sheet
It has also pumped unprecedented amounts of liquidity into the banking system using loans and new auction techniques. And recently the central bank began providing credit directly to businesses and financial institutions by buying commercial paper and other assets.
As a result, the Fed's balance sheet has ballooned to $2.1 trillion from less than $900 billion a year ago. On Nov. 25, it said it would buy another $800 billion worth of asset-backed securities, expanding the balance sheet to almost $3 trillion.
purpose of central banking is to ensure sound money and safe banking
federal deposit insurance
Key function: the lender of last resort, provides cash to temporarily illiquid banks.
Walter Bagehot, warned us that there would be times when a central bank couldn't effectively distinguish between illiquidity and insolvency.
Federal Reserve
Committed
Spent up to Nov 08
Commercial Paper Funding Facility LLC
CPFF
1,800,000,000,000
270,879,000,000
Term Auction Facility
TAF
900,000,000,000
415,302,000,000
Other Assets MBS??? TALF partII?
601,963,000,000
601,963,000,000
Money Market Investor Funding Facility
MMIFF
540,000,000,000
0
Term Securities Lending Facility
TSLF
250,000,000,000
190,200,000,000
Term Asset Backed Securities Loan Facility
TALF
200,000,000,000
0
Other Credit Extensions (AIG)
122,800,000,000
122,800,000,000
Primary Credit Discount
92,600,000,000
92,600,000,000
ABCP Money Market Fund Liquidity Facility
AMLF
61,900,000,000
61,900,000,000
Primary Dealer and Others
PDCF
46,611,000,000
46,611,000,000
Net Portfolio Maiden Lane LLC(Bear Sterns)
28,800,000,000
26,900,000,000
Securities Lending Overnight
10,300,000,000
10,300,000,000
Secondary Credit
118,000,000
118,000,000
Total
4,655,092,000,000
1,839,573,000,000
percentage to grand total
59.00%
A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.
The Manipulation of Gold Prices. James Conrad 4 Dec Seekingalpha.com
By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets.
The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.
First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.
A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.
At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.
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