The Federal Reserve

The Federal Reserve has developed into The United States Bank.  Since the very beginning of our nation, a central bank has been debated.  Thomas Jefferson and James Madison were opposed to a central bank.  They  saw it as an engine for speculation, financial manipulation, and corruption.  However in 1791, just a couple years after the Constitution was accepted, the first central bank was established.  That bank was wildly different from today's Federal Reserve.  The first bank was only responsible for creating 20% of fiat currency.  Private banks controlled 80%.  This first bank lasted until 1811.  The Congress sold the nation's interest in that bank.  The First National bank was partly owned by foreigners. 

In 1817 the Second National Bank was established.  It was modeled after the First, but was privatized in 1836, and liquidated in 1841.  The government was the largest stock holder in this bank, and it worked for the treasury to pay the bills of the Federal government.  There was major opposition to it and that is why its charter was not renewed.

From 1863 to 1913 National Banks performed those duties, and in 1913 our current Federal Reserve was established.  Over the years there has been changes, and today we find that the regionalized Federal Reserve controls our money supply and because of this can have an effect on our economy.  Today it was announce the Fed was beginning QE3.  What does that mean?  We are currently in a recessionary cycle, businesses are having issues selling their wares to the public.  The people have it in their heads that bad times are here for a while, and as such they have pulled back on spending.  When that happens then factories over produce, and eventually lay off workers.  The the cycle will repeat until some way is found to encourage people to enter the market once more.  It can be things like low borrowing rates, or as simple as printing more money.  That is what QE3 does, it is keeping interest rates down, and is buying government bond, which increases the money supply.

The hope is that this will encourage people to buy higher priced goods like house, cars, or appliances.  This will put people back to work making these goods.  Those people will be more open to buy other things, which puts more to work.  And then we will reach an expansion in the economy.  The most recent expansion period began in the early 1980's and ended in mid 2000's. 

The business cycle is just that.  It cycles from recession to boom and back again on a somewhat regular basis.  These cycles are not all bad.  As long as the people prepare, then actually recessions can help fuel the expansion.  That is not to say there is not pain, there certainly is, however, recessions do make companies more efficient, bringing down prices which does benefit all of us.

Today is interesting.  It seems the most volatile prices in our economy are fuel and food.  That makes what is happening all the more painful.  The food portion is primarily as a result of two things, the drought and federal policy that diverts food crops to energy (ethanol).  Fuel is another thing, see because of our dependence on outsiders, and the emergence of economies in China and India, global demand for energy is increasing even in this recession.

Until we get energy costs under control, I am afraid this recession will drag on.  Global production of energy has to increase to bring costs down.  OPEC, works to keep prices up in oil by controlling production.  We need non OPEC alternatives.  When oil drops in price, every corner will display it.  When energy costs fall, then production will increase.  We need to produce more of our own energy, making OPEC less important to the overall energy picture.  The side benefit might also help settle the middle east. 

The Fed believes QE3 will help.  QE1 and QE2 have not gotten us out of this recession, so why would this one?  Isn't insanity doing the same thing over and over again, and expecting a different result?  By the latest catch phrase:  I'm just sayin'.