Wednesday, March 19, 2008

I don't trust the Federal Reserve

The media these days has given all of us lowly commoners the idea that the Federal Reserve controls the economy in the United States. To some extent, I agree with that notion, but only on a more ideological rather than practical level.

The Federal Reserve is the central bank of the United States. It loans money out to all other banking systems and sets the interest rates for the return on that money. The banks, in turn, use their money to help other businesses and individuals buy the things they need (or want) to conduct their business. Essentially, it's a trickle down effect. The banks themselves loan money out at their interests, which tend to be slightly to massively higher (depending on the loan type) than the Federal Reserve's interest rate.

The Federal Reserves also sets the amount of money a bank can hold and apparently also prints money or manages the amount of money to be printed and placed in the economy. If you ever take out a dollar and look at the top, it should say "Federal Reserve Note" and, in smaller print, "This note is legal tender for all debts, public and private." Basically, "legal tender" is the government's way of forcing others of accepting it in payment of debts. So the cash you carry in your pocket is not really worth anything anymore than how the government decides to use it. While the currency used to be backed by gold, it was actually like owning stock in gold. Essentially, when the money was tied to the gold standard, it was like owning a small fraction of a gold bar in a safe somewhere. But now, since it is no longer backed by gold, it is considered to be acceptable as payment in exchange for goods and services. Unfortunately, when it isn't backed by anything, Congress tends to print more money to pay its own foreign debts.

But that's a whole other problem. Right now the Federal Reserve is run by a Board of Governors (not elected state executives) and a Chairman. This brings up an interesting problem. If the Federal Reserve has only a few men in the back room determining the interest rates and money flow, wouldn't that alone be enough to scare you? In a true free market economy (and most regulated economies), buyers and sellers make millions, if not billions, of deals and transactions every day. The transaction is too fast for anyone, no matter how many you have, to really track down or accurately predict. What can a few men do to properly manage and predict the economy then?

The Federal Reserve is the big business Socialism holdover from the turn of the century. Woodrow Wilson was the President who signed it into law and he was notoriously progressive minded. By centralizing the banking system, he effectively set us all up to be at the mercy of a few men, who are, at the end of the day, only men.

But also, they are the ones who have basically encouraged the climate of excess we now see in this country by keeping interest rates low and the money flow high. I'm not saying that we should have interest rates raised in the future to double digits, but I am saying that the Federal Reserve shouldn't be bowing at the alter of scared business man and trying to keep banks from going under. The truth is that these businesses should have to face the losses they brought on themselves by allowing their customers to accept stupid credit from them. Consumer credit is one of the most damaging products of our time and I doubt that any civilization can prosper in the long run with such a product on the market.

While the Fed is not to blame for this, they encourage it each time they lower interest rates and they are always looked to for fixes in the economy. The truth is that these men are part of nothing more than the oldest Socialist institution in this country.

There should be no central bank in this nation. I don't care about the logic behind having one. Banks should be allowed to operate without any kind of restriction or regulation from the government, but should also not be insured by the government. Money should be printed and tied into the value of some commodity so that it remains stable in value and keeps politicians from engaging in too much deficit spending. Otherwise, one day, our nation will find ourselves in a situation that Master Shake (from ATHF) found himself in at the beginning of the episode "The" (There used to be a whole closet full of TVs in here!).