The Fed - Part II

In part I, we talked a little bit about what the Fed does, and how it tries to juggle its multiple mandate to safeguard the banking system, achieve the highest level of employment possible, and keep inflation under control.



But what about the provocative title, about the New World Order and Jewish Conspiracies?  Well, a quick look around the intertubes will show you that there's an awful lot of people who think those things and more, though ironically these days there seem to be more websites debunking those stories than there are sites purveying them.

The Jewish conspiracies stem from the usual sources, such as 'The Protocols of the Elders of Zion,' the infamous 19th century forgery that claimed to be the minutes of a meeting in which Jews plotted to control the world.  And then German/Jewish emigre Paul Warburg, of the famous banking family, was instrumental in the creation of the Fed.  Recent years have fanned the flames, especially since the last two Fed chairmen, Alan Greenspan and Ben Bernanke are both Jewish.  That covers the past 21 years, believe it or not.

The 'New World Order' stuff emanates from a separate but intertwined strand of paranoid thinking, revolving around 'money power.'  Though money power conspiracies are often tied up with Jewish conspiracies, they actually have a separate and fascinating history of their own.  For a great discussion of this, by the way, check out Daniel Pipes' book 'Conspiracy: How the Paranoid Style Flourishes and Where it Comes From'.  These theories go back at least to the French revolution, the illuminati, and the early Freemasons.  Some trace them back to the Knights Templar and even further.  Money power theorists love to point out all the secret symbols on the money, and they are obsessed with the valuelessness of paper money, or 'fiat currency,' as it is known.  They prefer gold, which has tangible value.

Personally, I've often wondered about that.  why does gold have tangible value?  Because we agree it does.  and that's why our money has value, too.  Of course, the government can print too much money, causing the money to lose value... but then governments have been famous for watering down the currency even when it was made of metal.

It's the Fed that creates money out of thin air (not really), and that's why they're the center of the money power theories.  The Fed was also chartered in an odd way, to get around the founding fathers' dislike of central banks.  A series of banking crises in the 19th and early 20th centuries convinced many people of the need for a central banking authority, but they structured it as a private corporation - owned by the banks in each region of the country.  And yes, the Fed does earn a profit every year, which they deposit into the US Treasury.  Not into the coffers of the member banks or anyone else.

The Fed's independence is another source of paranoia, but this I will tell you from experience:  the more independent a central bank, the better they'll be at taking the sometimes painful steps needed to fight inflation, and in the long run the better they'll be at achieving their other goals of maximum employment and banking stability.  If anything, the Fed has become less independent in recent years, and their inflation fighting credibility has suffered.

As to what they're doing now - flooding the system with cheap money to keep the banks afloat at the risk of causing inflation even as growth falters - well, that's why I think of the current situation as the Hurricane Katrina of finance.  We'll have to wait for another post to talk more about that.