The Federal Reserve is Not Your Friend

The Federal Reserve is Not Your Friend

Not everyone makes a good neighbor but sometimes it is easier to adapt or tolerate than move.

In response to the depression of 1907 and 08, the major banks determined that future economic turmoil could only be handled by a central authority.

Congress complied and in 1913 a central bank, the Federal Reserve, was established. This ended a discussion of money that went back to the foundation of the country.

Was it necessary?

• The country survived without a central currency for over a century and a quarter. Money was issued based on the reputation of banks and states. There was no reason for a central currency.

• The Fed has not proven itself especially skilled in the last century. The 2008 recession, notably signaled by the Lehman collapse, suggests problems with Fed policy.

Its independence has problems.

• The dual mandates – stable economy and low unemployment – are not complementary. Today’s inflation and money manipulation are a sign of a disconnect between monetary and government fiscal policy.

• It is run by big banks which are most likely indifferent to smaller banks and smaller financial entities.

• While independent, it gives cover ro politicians who have no respect for economic reality. Counterfactual today, 19th century banks had to follow policies that protected themselves and their reputation.

The Fed as your neighbor.

Regulatory capture should be the first thing an economist examines. It is, thus, a monopoly with the authority to regulate the competition.

But you cannot move out of the neighborhood.

You can innovate. The big boys have a history of living on the bleeding edge, innovating because their financiers have pools of money that need hard-to-get returns.

A careful innovator with strong analytics should be able to play in this neighborhood.

🔔 Follow Brian on Linkedin: Brian Pillmore

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