Tuesday, April 1, 2008

Origins of the Federal Reserve Part I I and other observations

Part II

The Bank of the United States was chartered for a 20 year period. Once the charter had expired, and the debts were serviced, there would not beat a need for the bank. Once the charter actually did expired, the United States suffered a financial panic in the early 1800's. In order to stave off the panic, a Second Bank of the United States was created. Once again, this allowed the United States to pay down debts accrued during the War of 1812.

Andrew Jackson noted that members of the Second National Bank had become too rich, too powerful, and too self-serving. Jackson's corruption inquiry into the Second National Bank practices provided evidence of an abuse of power including election tampering. With this in mind, Jackson dissolved the bank (before its charter expired) because he saw the concentration of wealth as a threat to American liberties. After this bank was folded, banks returned to a more private venture. This was part of the National Currency Act of 1863 allowing banks to use one nationalized currency. However, there were two problems: 1. A lack of liquidity and 2. A currency that was viewed as inelastic.

After the Panic of 1907, Congress began floating measures that would sure up the economy. The most notable was the Federal Reserve Act of 1913. The United States based its system on European-Central Banking Systems in general, and specifically the German banks. The Act passed Congress in 1913 along partisan lines. Democrats who supported a quasi-state controlled institution, and Republicans who favored a private institution controlled bank. The new Federal Reserve now had the power to print money and control monetary policies.

The goals of the Federal Reserve are:
  1. To address banking panics
  2. To serve as the central bank for the United States
  3. To strike a balance between private interests of banks and the centralized responsibility of government
    • supervising and regulating banking institutions
    • protect the credit rights of consumers
  4. To manage the nation's money supply through monetary policy
    • maximum employment
    • stable prices
    • moderate long-term interest rates
  5. Maintain the stability of the financial system and containing systemic risk in financial markets
  6. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
    • facilitate the exchange of payments among regions
    • to be responsive to local liquidity needs
  7. Strengthen U.S. standing in the world economy
While the Federal Reserve has done more good than bad, American should always look at it with a high degree of scrutiny. The Reserve's policies must be economically sound, and consider the best interests of the American people.

Other Observations:
Beware of the sucker's rally. As Wall Street posted record type number on this trading day, I wanted to remind all readers that more banks will write down debts. A number of ARM loans are still in the process of resetting. While the Fed did infuse a large amount of cash to increase liquidity, one must consider the longer term effects of gas prices, job reductions, and inflation. The consumer is still tapping out of credit. Credit cards are being used for necessities like gas and groceries...and balances are being kept on those credit cards. It may be well that history will record this period as a blip on the downward trading cycle. However, the fundamentals of the economy have not changed for the better. A bad bank in one quarter is still a bad bank in the next quarter. However, I believe the FED has played an important role by allowing BIG BANKS the credit line to sort out Wall Street's financial problems. It appears that the powers that be believe the rebate stimulus and FED overhaul will be enough to stave on a massive financial meltdown. AS of now, the best place to put cash is either under your mattress, or into a business that you have direct control of.

1 comment:

AX said...

Nice history lesson, TC. Beware indeed of the credit crunch. Unemployment over 400K, auto loan delinquencies at an all-time high, and decreasing credit limits on higher interest rates all make for difficult times ahead. Karen Finerman of Fast Money mimics my call of a few months ago on shorting COF. The worst may be far from over for a bank whose primary business is credit cards...