The Fed has been under pressure a lot, and in the news quite a bit. The title had been thrown into conversations about the economy, but what does it really mean, what do they do?
Don’t be shy if you don’t know exactly what it means. Here is an article that explains it “like you were a 8 year old.”
DALLAS – The federal bailout is running a staggering price tag. Some estimate it is as high as $8.5 trillion.
Much of that money is handled by a part of the United States government few of us really understand, the Federal Reserve.
What exactly is the Federal Reserve and what do they do? The answer to the latter part of the question is apparently a lot of things.
Below the Dallas Federal Reserve building is billions of dollars in cash, which is the people’s money supply.
But, the most important job for the Reserve right now is to stabilize the US economy.
“Think of the thing as one giant lawn,” said Richard Fisher, president of the Dallas Federal Reserve branch. “The object is to keep it green and verdant and beautiful.”
Running with that, the lawn is the economy and the Reserve is in charge of maintaining a stable money supply – or a consistent amount of water available to grow the lawn.
Typically, the Reserve stabilizes the money supply by lowering or raising interest rates.
“We have the spigot,” Fisher said. “That’s the typical tool we use that turn on by lowering interest rates, or we tighten.”
The financial system, banks and the like, act as the hoses. But, right now they’re are all twisted up and not letting the money through.
“When we would cut interest rates, we wouldn’t see the efficiency of the flow because the sprinkler system was out of whack,” Fisher said.
So, the Reserve is now trying to untwist the financial hoses by injecting huge sums of new money into the financial system. In some cases, the Reserve has taken the unprecedented step of laying new hoses of its own, new programs that stimulate lending for things like cars and credit cards.
“The grass is not brown,” Fisher said of the “lawn” right now. “But, it’s certainly not a vibrant green we would like to see it be. It’s a little spare.”
Who knew gardeners wear suits?
December 18th, 2008 at 3:23 pm
How could I have missed this one! The FED, my FAVORITE topic!
OK, for starters, the Fed likes to use deceit in describing what they do, don’t play into it. The fed does NOT “control interest rates” outright per se. What they actually do is manipulate interest rates through control of the money supply.
Here’s the deal. In the beginning the Fed was created because our country had (what some called) a problem with bank runs. I won’t get into bank runs, if you don’t know what they are you can google it. Anyway, the Fed was created to be a ‘lender of last resort’ in order to help suppress these bank runs. It’s important to know that not everyone wanted a fed, and one of our greatest (in my mind THE greatest) presidents Andrew Jackson spent his entire presidency fighting against a Fed.
So we get this Fed or Central Bank to backstop banks incase of a run. But then comes the Great Depression and lo and behold the Fed doesn’t even do it’s job. So we create FDIC to take over that part of the Fed’s job, and the Fed dubs itself now in charge of promoting economic growth. Congress is like ‘cool cool, you do that, but your must do it by promoting stable prices (no inflation) and promoting full employment.
Fast forward to today. During their tenure as Central Bank, the fed has dumped our gold standard to inflate our currency and thus has faltered on the stable prices part. And we have had numerous recessions, bubble burts, whatever which WAY BACK IN 1974, F.A. Hayek proved (when he won the Nobel Prize) was actually being caused by the Fed.
So we have this central bank that over time has ruined our money by printing too many dollars (inflation) and causes these huge bubble bursting recessions.
Back to the original point on interest rates. They actually control the money supply, but by printing a ton of NEW $$’s when times are tough, it becomes cheaper to borrow money a’la lower interest rates. When times are good and heating up, they take money out of the system and it becomes scarce a’la higher interest rates.
Unfortunately 99.9% of YOU have no idea what they do, why they do it, or how much harm they actually cause. Fact is, the Fed is in place to keep the rich rich and the poor poor. If you ask me, END THE FED NOW.
I’ll leave you with this. Remember the old argument about Trickle Down Economics? It was all about lower taxes on the Rich, which makes their business more profitbale and thus they hire more? The REAL trickle down economics is when the Fed increases the money supply and interest rates drop. It allows the wealthy to borrow money at lower rates. Same impact, they don’t share it with you.
December 23rd, 2008 at 9:54 am
Great explanation. Thanks Mark.
The government controls too much and is not paying attention.