The Fed - Tool of the New World Order or Jewish Conspiracy? Part I

How about 'none of the above?'  Of course, there are many people who would pick both, and add a few choice words as well.  It is true enough that the founding fathers were very suspicious of central banks, and worked hard to prevent the United States from having one.  These days, though, a country without a central bank is like a hockey team without a goalie - it's not against the rules, but it would lead to some wild action.



The Fed is a favorite target of conspiracy theorists of all stripes, most of whom seem to believe that currency must be backed by gold or have no value.  The fact that the Fed is independent of Congressional oversight (not entirely true) or the President - once he appoints the Governors - certainly adds to mistrust.  Alan Greenspan, chairman of the Fed from 1987 until 2006, also exacerbated the problem with his famous lack of clarity and air of ivory-tower wizardry.  Ordinarily I'd add a couple of links to conspiracy theory websites, but I don't want to dignify them... oh, okay, just one. This is a youtube video: http://www.youtube.com/watch?v=sTqDFss24Hw. 

The Fed has at least three major functions, one of which is really boring and never talked about, one of which is usually overlooked, and one is the source of all the moaning and complaining.

The boring:  The Fed is responsible for all check clearing for the entire banking system.  They also clear transactions in US Government securities and perform a whole bunch of other mechanical, boring, and absolutely necessary banking functions.

The never talked about - though more important recently: The Fed's number one highest priority is to safeguard the stability of the US Banking system.  They do this by auditing banks, setting reserve requirements, monitoring the overall health of banking institutions, and when necessary providing a virtually unlimited flow of cheap funds into the system.

The source of all the moaning: The Fed monitors and adjusts the supply of money in the banking system, and using this tool attempts to keep inflation under control while maximizing employment.  This is what makes the conspiracy nuts get their knickers in a twist. 

The basic theory - and the only one necessary if you're what is known as a monterarist, is that inflation is a monetary phenomenon.  Print more money than necessary, you'll have too much money chasing too few goods, and prices will rise.  Print less than needed, and demand will fall, and so will prices.  The Fed manipulates the supply of money through the Fed Funds rate, which is the rate that banks charge each other for overnight loans on their reserve balances - held at the Fed.  Every day, the Fed tries to figure out how much is needed to make sure all the banks have the right reserve level, and adds or subtracts funds to make everything balance.  If the Fed wants the rate to rise, they subtract money from the system and the banks accordingly charge each other more.  If the Fed wants the rate to fall they add a little, and down comes the rate.  The key thing is that the banking system takes its cue from the signals put out by the Fed as to where it wants the rate to be - and these days they announce the target rate so everyone knows what it is.  The higher the target rate, the tighter the policy.  Tight policy (in theory) chokes off demand and kills inflation, at the risk of killing off economic growth.  Loose policy sparks demand, encouraging economic growth, but risks causing inflation.

This manipulation of the economy by an unelected group - some would call it a cabal - is the source of an awful lot of resentment and the root cause of the paranoid thinking that leads to conspiracy theories.  I'll stop here and continue later in another post - I think we all need to sit back and digest a little.