Posted Jan 10, 2014 by Martin Armstrong
The Federal Reserve began as a simple private sector clearing house/insurance fund, which is why the banks were the owners. Yes, the Fed was given the power to create money that was to be ELASTIC. They would create money during a bank panic to satisfy demand and then shrink it when depositors return to the banks. This was actually a good idea insofar as it could create cash when people were in a panic and that prevented the banks from closing and having to dump assets at pennies on the dollar such as mortgages, This was a fantastic idea to stabilize the economy in a panic. If people knew they would always get their cash, then there was no reason to panic.
The flaw in banking that makes it unstable and prone to panics is simple. For you see, the banking system was based upon borrowing from the public on demand paying short-term rates and lending long-term such as in mortgages and business loans. The entire model ASSUMED the yield-curve of long-term rates higher than short-term was standard. But in a panic, the yield-curve flips and becomes inverted were short-term rates rise above long-term.
The design of the Fed was correct, brilliant, and not some wild conspiracy. What happens is people, not knowing the history, always judge things but the current terms. In 1913, the Fed “stimulated” by purchasing corporate paper NOT GOVERNMENT. The entire thing was a private sector solution that worked. Now enters government. World War I starts and they need to issue debt so they INSTRUCTED the Fed to buy government bonds not corporate paper. Fine if this was temporary for the war. But the way government screws things up consistently, they never put anything back. The killed the real stimulus quality of the Fed that was its ability to restrain unemployment by supporting companies in time of need.
Add to this the idea that INFLATION = the rise in the QUANTITY of money, and suddenly the Fed is now seen as the inflation fighter and its job is now to sterilize the reckless spending of Congress. It was like Congress can go get anyone pregnant without any responsibility for the consequences.
The Fed always was set up with 12 branches BECAUSE it was discovered that there were regional capital flow problems. Therefore, proper to Franklin Roosevelt, each branch of the Fed was independent and it could lower the local interest rates when too much cash existed in its domain or raise it when there was a shortage. Corps come in and cash flows to the wheat belt. During planting, no cash is coming in, it all leaves. It was the NY Fed that tried to manipulate rates to influence international capital flows lowered US rates in hopes to deflecting the capital outflows from Europe. Pictured here were the four central bankers of NY, London, Paris, and Germany in their secret meeting to first try to manipulate international capital flows that backfired.
World War II enters and Roosevelt (1) usurps all power to Washington and imposes a single national interest rate abandoning the Fed design and purpose, and (2) instructs the Fed it was now required to support the government bond market at PAR using that ELASTIC authority to monetize debt to sterilized the cost of the war. The Fed was thus mandated to support the government bond market until 1951.
With the last 2007 Crisis, we created this idea of TOO BIG TO FAIL to support AIG and insurance company to prevent it from defaulting on Goldman Sachs. That scheme is now embedded within the system and nobody really understands that was ro save Goldman – not the economy. So the Fed, which was a private bank fund, is now guardian of the entire economy and can deem anything TOO BIG TO FAIL and take it over. It has now claimed that hedge funds in excess of $100 billion are the lucky candidates. They can deem anything now TOO BIG TO FAIL and have dictatorial powers over the private sector.
Now we are so far from its original purpose and design it is no longer a central bank. This was by no means a conspiracy hatched at Jekyll Island. This is a patch-work of government mismanagement as always. This is not some grand conspiracy that transcends generations. These people are not that smart and there is no collective consciousness in government. That is reserved for human kind – not government.