In this episode of Bankless Shows, Christopher Leonard, author of The Lords of Easy Money joins Ryan and David from Bankless to discuss Fed's origins, purpose, and concerning behavior.
Read our notes below to learn more.
Should We Be Worried About What the FED is Doing?
The Federal Reserve has been doing these experiments with easy money which started in 2010 and they have broken into an entirely new graph that has changed the financial system and monetary policies in deep ways.
In 2022, the FED is trying to do Quantitative Tightening(refers to the process the Fed is using to reduce the size of its balance sheet, which reached nearly $9 trillion at its peak earlier this year)
This is a wildly distorted environment where the FED has no clue how this is going to play out.
This is Insane
FED was built to be insulated from the voters and was created to be run by a Committee of 12 voting members in Washington DCA who meet every 6 weeks to make hugely consequential decisions without facing any election or an outside entity.
What the FED has been doing over the past decade has been experimental and unprecedented.
The Federal Reserve is the only institution in the world that has the superpower to create new US dollars out of thin air.
For the first 95 years of its existence, the FED had steadily printed about $900 Billion dollars into the supply, and between 2008 and 2014
The FED had printed over $3.5 Trillion US dollars which means they printed 3 centuries' worth of money printing in four and a half years.
Origins of the Fed
In the late 1800s to early 1900s, there were thousands of currencies issued by different banks floating in supply.
To solve this problem, The Meeting at Jekyll Island happened off the coast of Georgia in 1910 where senators and bankers create the Federal Reserve and the job was to create a stable national currency which is now known as the “U.S Dollars”.
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A Young Fed
70% of Americans earned a living through Agriculture in the early 1900s and financial stability was critical to businesses.
In 1913, Congress passed the Federal Reserve Act to establish economic stability in the U.S. by introducing a central bank to oversee monetary policy.
From Gold to Fiat
The gold standard imposed an external discipline on the money supply but it was inflexible.
Three Days at Camp David is a great book that discusses Nixon’s decision to go off the gold standard.
Once the U.S. dollar was off the gold standard, it was up to the 12 voting members of the FED who got to decide the expansion of the monetary base and they start printing money to get out of problems.
A Tool of the State
FED is a hybrid creation that is a private bank owned by other banks and it’s governed by the government.
FED was modeled on the Federalist system where there was state power and federal power.
Out of the 12 voting members in the FED, 7 of them are the Board of Governors appointed by the President of the country in Washington DC and 5 of them are from the FED’s own Regional Banks.
The committee debate transcription is released 5 years after the event and it’s fascinating to hear the arguments from the committee members.
Incentives and Structure
During voting on policies, only a few times has there been a 7-5 vote in the history of FOMC, it is 99% of the time 12-0, 11-1, or 10-2.
The votes are unanimous because they are substantiated elsewhere in detail before the vote, and this is to make sure that there is consensus with the FED as the fiat currency is based entirely on faith.
Against Ben Bernanke
FED under Ben Bernanke from 2010 to 2020 did Quantitative Easing which is just injecting newly created dollars into the Wall Street Banking system.
FED also kept interest rates pegged to 0 from 2008 and 2015, it was an experimental thing to have done that only benefitted one percent of the rich.
Ben Bernanke pushed the committee in a political way to vote unanimously by meeting with members who were disagreeing to help drive economic growth and unemployment.
Christopher’s book The Lords of Easy Money focuses on Thomas Hoenig who was the only person to stand up against the culture of groupthink and warned about the bubbles and inequality in wealth that could be created because of Quantitative Easing.
Institutional Pressure and Jay Powell
FED was created to manage currency in a stable way and not to manage unemployment and FED cannot solve problems through money printing.
The current FED chairman Jay Powell in 2012 used to say what the FED is doing with printing money was crazy and advised to stop QE.
Powell has said that he changed his stance to supporting QE based on evidence when his colleague Fisher said there was no real evidence that pointed out that QE was good.
If Powell opposed QE, he might have not been appointed by President Biden to become the FED chairperson.
During the COVID crisis, Powell was on the phone with the CEO of BlackRock Larry Fink 17 times and later FED announced Quantitative Easing.
Banking Pressure
The banks benefit the most during Quantitive Easing.
FED was created to stand behind Wall Street, and the newly printed dollars move to the primary dealers which are Banks like JP Morgan.
This floods the Wall Street Reserve accounts with new cash that drives up assets, bonds, and securities.
FED is even being forced to focus on Climate Change.
The Terminal Point
Mario Draghi, Former Prime Minister of Italy believes that we have reached the Terminal Point of the FED as they have printed 300 years' worth of money in a few months during COVID.
Wall Street still believes that the FED will pivot to start printing money again whenever the Inflation Report comes lower than expected.
What Comes Next?
Multi-trillion dollar question is what the FED is going to do next and how events are going to play out.
This is an impossible situation where FED has to accept high inflation or crash financial markets.
What to do about the Fed
A central bank is needed to create and manage our National Currency.
Reform of the FED to be a decentralized body is critical, and Democratic oversight is needed.
The Legacy of the Fed
William Jennings stated, “You shall not crucify mankind on a cross of gold”. The United States should abandon the gold standard to stimulate industry resonated on the ground level.
Terms used by FED are not easy to understand for the majority of people and the FED knew that by boosting asset prices only the richest 1% of American own the assets to profit from them.
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