Posted Sep 10, 2016 by Martin Armstrong
ANSWER:I wrote several times that the original design of the Federal Reserve would have been a good, stabilizing entity for the economy had the politicians left it alone. At first, to ease recessions and “stimulate” the economy, the Fed only bought corporate paper to provide liquidity directly to the economy.
Then World War I came and this short-lived mechanism was altered. Congress ordered the Fed to buy only government bonds so they could fund the war. They never put that system back in place, so today Quantitative Easing no longer works because the Fed ONLY buys in government bonds from banks who never lend the money out. The Fed embarked on then buying in mortgaged backed securities, again, to help the banks get rid of real garbage. Once more, there was no direct stimulation, for the banks hoarded the cash by depositing it at the Fed in excess reserves.
The second structural change to the Fed came at the hand of Roosevelt, who used the Great Depression as his excuse. FDR usurped all the power to Washington, eliminating the very purpose of the Fed to manage the regional capital flows. Each branch of the Fed maintained an autonomous structure to balance out the regional capital flows, which are ignored today. That meant that each branch maintained its own interest rates to either deflect excess capital (lower rates) or attract capital when there was a shortage in that region (higher rates).
These two primary structural changes to the Federal Reserve have eliminated the government’s power to properly manage the economy. It also feeds the conspiracy theories, for at first the Fed was a private entity funded by the bankers, not taxpayers. So today, people cook up conspiracies because the Fed still has the shareholder structure, but has become a government controlled agency all because Congress made these two changes and never restored the Fed to its original purpose – to act as a rescue fund for banks in trouble WITHOUT taxpayer money. We have SPIC insurance where brokerage houses must pay in for that insurance, which was the same scheme originally designed for the Federal Reserve.