US Government Is Beholden To The Fed; And Vice-Versa
Politics / US Federal Reserve Bank Aug 15, 2019 - 07:03 PM GMTBy: Kelsey_Williams
We hear quite a bit today about the issue of Federal Reserve independence. The crux of the argument usually centers on monetary policy executed by the Fed versus opinions of politicians and others who want and expect something different, which they believe will provide more favorable results.
President Trump has been ardently vocal in demanding that the Fed be more aggressive in cutting interest rates. He also wants, and is encouraging, action that would result in a weaker US dollar. He believes that it would be good for American businesses. His reasoning is that a weaker US dollar would make American-made goods more competitive.
Whether or not the President is correct doesn’t matter for purposes of this article. What is important is that there is a wide difference of opinion between the Federal Reserve and its current policies (re: Jerome Powell) as compared to the wishes of the United States government (re: President Trump).
Highly publicized verbal jabs have provoked additional discussion on the subject of Fed independence. Implications of the use of Presidential power to force a change have not gone unnoticed. The Fed chairman has been equally forthright in his resolve:
- “We never take into account political considerations. There’s no place in our discussions for that. We also don’t conduct monetary policy in order to prove our independence,” …Jerome Powell
Public disagreement about Fed policy between a President and the Fed chair is nothing new. It has happened historically with nearly every Fed chair. Last week, four former Fed chairs (Volker, Greenspan, Bernanke, Yellen) spoke out in unison regarding their opinion on the subject of Federal Reserve independence:
“We are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons”
Who’s right? If the Fed is “act(ing) independently and in the best interests of the economy” why should they be subject to continual second-guessing at every turn?
President Trump has called for more aggressive interest rate cuts and a weaker US dollar in order to make American-made goods more competitive and help American businesses. Isn’t his intention in harmony with “the best interests of the economy”?
It is not just a matter of right or wrong, though. A clearer understanding of purpose and some historical perspective will help with our analysis and, possibly, shed some light on the matter.
The Federal Reserve began operations in the year 1913. Its origin is steeped in controversy and intrigue. The term conspiracy has been used to describe its birth and its existence, and similar accusations have been employed to describe its purpose and actions.
The Federal Reserve is a bank. Its existence was authorized by Congress, but it was not referred to as a bank because of the negative views of American citizens and the banking public.
It was the product of a collusionary effort between some high profile bankers and politicians.
The American public and most of Congress were skittish and unsupportive to efforts to create a central bank. Panics and crashes had left a bad taste in people’s mouths and this was two decades before the stock crash in October 1929.
In order to allay the fears of the American public, and convince Congress that it was in the best interests of the country to authorize by law the existence of this ‘private’ institution, it was necessary to effect a campaign at two specific levels: grass roots, i.e., the American public; and, behind closed doors, i.e., politicians and the US government.
Enlisting political support was obtained by providing a way for the US Government to fund its operations. Taxes are never enough for any government. All governments borrow and spend limitlessly.
The Federal Reserve provided a convenient ‘funnel’ for US Treasury securities in the form of bills, notes, and bonds. These securities are a form of debt that is “monetized” on issuance and become a source of collateral and funding for trillions of dollars worth of economic activity.
Today, US Treasury securities are issued and sold at auction. A portion are sold via the program Treasury Direct, but most are placed with certain primary dealers. Any unsold securities are required to be kept and held by the primary dealers.
The Federal Reserve also holds Treasury securities on its own balance sheet. Between the Fed and its primary dealers, plus any Treasuries sold to the investing public, the US Treasury receives an amount of money equivalent to the dollar amount of securities it has issued. This is true always – every time; regardless of any undersubscriptions.
In other words, the Federal Reserve underwrites and guarantees that the US Treasury/Government will get whatever funds it needs. And that was the promise made over one hundred years ago.
The American public needed to hear something else. Politicians knew that public support for a central bank was not strong. The message delivered was that the mission of the Federal Reserve was to manage the stages of the economic cycle (recession, depression, recovery, prosperity) and, thus, avoid the extremity of panics and crashes that had plagued the banking industry and put depositors at continual risk.
The statement of intention to manage the stages of the economic cycle was born out of necessity. Members of Congress would not vote in favor of any bill authorizing existence of a central bank without their constituents approval. If the American public thought that there were benefits that could outweigh their fears, and if enough members of Congress felt similarly, and perceived that public support was sufficient, then possibly the bill could pass.
Eventually, it did; and the bastard child was born.
So, what did the bankers get out of this? The answer is found in one simple word. Money.
More specifically, they got control over the money. They were now legally authorized to be everyone’s sugar daddy, and, ostensibly, anyway, they had the support of the United States Government and its citizens.
Banks loan money to individuals, companies, and governments. They also fund and loan money to Wall Street Investment Banks (themselves) dictators, revolutionaries, subversive organizations, and global conglomerates with dubious activities.
One of the intentions behind the private bankers at the point of origin for the Fed was to be able to keep an eye on smaller, individual banks that might get into financial difficulty and cause problems for the entire industry. In other words, the Fed acts as a sort of safety net for those institutions.
The Fed is not particularly interested in the profitability or welfare of the smaller, individual banks. It is, and always has been, concerned about the preservation of the system which allows the banks, especially the big, power center banks, to operate and function without interruption, and on a hugely, profitable scale.
With the inception of the Fed, the bankers could protect the interests of their elite heirarchy and retain control over the money supply, lending activities, fund their own special interest activities, and make tons of money doing it.
Now lets revisit our original “difference of opinion” between the President and the current Fed Chairman. Regarding Chairman Powell’s statement that “We never take into account political considerations.”, he is absolutely correct. “We” refers to the Federal Reserve Bank, not Chairman Powell.
Even if a change in chair were to be orchestrated, it would not change anything as far as the ongoing operation of the Federal Reserve (see: New Fed Chairman, Same Old Story).
The current debate between Mr. Powell and President Trump is entertaining. But it is not going anywhere.
President Trump is lobbying for a quick fix. Which is apparently motivated by his belief that he is right. Unfortunately, he is not right fundamentally. He is literally calling for the same bad medicine that the Fed has administered for more than a century.
On the other side, Chairman Powell and the Federal Reserve are not acting “in the best interest of the economy”, which is probably stated this way to take the emphasis off of the alternative reference to acting in the best interest of the American people.
The Federal Reserve does not act in the best interests of the American people. It is an institution of money creation which benefits elite bankers and power brokers. It is also doing everything possible to stave off systemic collapse, but it will fail in that attempt, no matter what actions are taken.
The inevitable collapse is the result of its own actions since its inception. The Fed has caused and exacerbated the very negative conditions which it says tries to avoid; and, on occasion, has even admitted its responsibility (see: Federal Reserve – Purpose And Motivation).
The Federal Reserve acts in its own self-interest and will do everything possible to protect and preserve its own interests.
Avoiding a systemic collapse is the current number one priority. That is because of the fear that deteriorating conditions could bring about full scale economic depression and loss of control.
Don’t expect the Fed to act logically, according to your understanding of their purpose and intention. They will act and do whatever they think is necessary for self-preservation.
And the US Government will not do anything intentionally to alter or modify its own gravy train.
By Kelsey Williams
http://www.kelseywilliamsgold.com
Kelsey Williams is a retired financial professional living in Southern Utah. His website, Kelsey’s Gold Facts, contains self-authored articles written for the purpose of educating others about Gold within an historical context.
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