Fed comes to the rescue!
By Melvin J. Howard
The Fed this week injected 200 billion into the system will this be enough? The market just yawned. Before I get started just what is the Fed and what do they do. The Federal Reserve System also known as the Central Bank is actually ‘split’ up into several components. There are 12 regional Federal Reserve banks, the most powerful one by far being the New York Federal Reserve Bank.. The Federal Reserve System is controlled by the Board of Governors (the Board) and the Federal Open Market Committee (FOMC). The Board has seven members who are appointed by the president of the United States and approved by the senate. The Board determines the interest rate for loans, sets the deposits reserve ratio which significantly affects a bank’s ability create new credit, and decides how much new currency Federal Reserve Banks will issue annually. The FOMC is made up of members of the Board, the president of the New York Federal Reserve Bank, and four presidents from other regional Federal Reserve Banks. The FOMC sets the open market policy which determines how much in government bonds the 12 Federal Reserve Banks may buy or sell (this is the major tool of monetary policy). There is also a Federal Advisory Council that is comprised of 12 representatives, one from each of the 12 Federal Reserve Banks. This council meets at least 4 times a year with the Board to advise it on and discuss general economic issues. The Board has the following main functions:
Set open market policies (responsible for interest rate and money supply movements)
Set the required cash deposits reserve ratio
Set the interest rate (called the discount rate)
Set how much new currency to print
Monitor the economy and also report periodically to congress on the U.S. economy.
Set how much new currency to print
Monitor the economy and also report periodically to congress on the U.S. economy.
The 12 regional Feds each have the following functions:
Buy and sell government bonds in secondary markets (open market operations that are responsible for interest rate and money supply movements)
Lend to member banks
Give check-clearing services
Enforce money deposit reserve requirements and other regulations of the member banks
Monitor banking and economic activity in the region that they cover
Issue Federal Reserve notes (money) and collect worn-out ones for destruction
One of the main jobs the Fed has is to reduce risk of banking system failure (which ultimately comes from sudden loss of confidence or trust in the system). Can you say QUANTUMNOMICS?
One of the main jobs the Fed has is to reduce risk of banking system failure (which ultimately comes from sudden loss of confidence or trust in the system). Can you say QUANTUMNOMICS?
As you can see they set the pace of the economy right now they are working overtime to stop the bleeding on Wall Street. The situation was compounded this week by the fact Bear Stearns had to be saved on the notion that it was to big to fail. What this really means is that the major section of the world banking sector must not fail. This would actually be disastrous for rich and poor alike, as in the great depression. In what is probably a less understood and less publicized financial crisis, but one that could have took down the US banking system was LTCM. The Federal Reserve had to step in and arrange a bail-out of the Long Term Capital Management Fund in 1998. While the public did not have to fund this one, it came very close. The US dollar is the hard currency or reserve currency of the world. Everything is measured in terms of the US dollar it is slowly losing that status. I for one would not like to see that to happen. Shorting the US dollar has become an everyday sport (calling on the Fed bring the greenback to the glory days). Students of business and economics should start attending physics classes. The problems come with having isolated disciplines of study. We are behind in picking up on these turn-of-the century revolutionary developments in physics. There is more to Quantum physics then the scientific revolution of how to make the atomic bomb. What we could learn is some pretty interesting flaws in the field of economics. Not only are today’s mainstream economic theories, and philosophies like objectivism, outdated by being based on the Newtonian or classical worldview, but these same outdated views are reflected in our current monetary system. The biases and distortions built into today's markets are making them very inefficient and highly volatile. I will be the first one to defend free markets but I want to make sure that there is a market left to be free.
