Was the FED always evil? | Logical Logs #31
A decision took a wrong trajectory, who would've guessed?
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People often forget history lessons. This time is different… everyone will make it… things are different now. History is overlooked because of the stories we invent and our different perceptions about the future. An organization once believed to function in people’s interest sails off-course from its pre-defined path and falls prey to corruption, mismanagement, and malpractice. If everything evolves according to the times, only then is it able to withhold its founding mission and serve for betterment and progress. That keyword, ‘evolution’, is necessary to justify the existence of something. If not, why do we need it? In present times, where the FED is bent on crushing markets and kicking the can down the road for inflation, we need something that suits us, something that has evolved to stand supreme.
History doesn’t repeat, it rhymes. It is a tool that can be used to debug modern society. So it is crucial to understand the root, where it all comes from. First, some common sense. The people that founded the FED, weren’t idiots. Nor the ones who put the dollar off the gold standard. They had big degrees from reputable organizations and knew how systems worked. They were far more knowledgeable than any common man today saying today that he would’ve done a better job running the FED. He can only say that because of the benefit of hindsight. The FED bankers didn’t have that. Give them some credit for making a decision in tough times.
Pre-FED era:
Let’s start from the beginning. The FED is the central bank of central banks responsible for price stability and a healthy labor market. It was founded in 1913 following the signing of the Federal Reserve Act. But what led it to it that is important. A burgeoning civil war followed by massive industrialization and conflicts in state and federal rights. The economy was in turmoil. There was a strict monetary base and the supply of banknotes couldn’t be expanded to fund operations. There was a high reserve requirement for banks and because of the gold backing banks abstained from risk. Well, free markets might have eased the situation but something would have broken. Above all, everyone was not on a common base. It is the duty of a government at such a time to step in and unite the nation. The creation of the FED was a step in this direction by creating a common monetary base. This would eliminate the disparity in the notes issued by various banks. It was like you would get the notes in Illinois and no one was ready to accept them in Kentucky. Interstate trade was crippled.
The FED’s real test:
The FED was formed in such an arrangement that a big central bank would have 15 branches which would be responsible for holding the reserves of their member banks; issuing currency; discounting commercial paper; transferring balances between branches, and check clearing and collection. All of this was decided and finalized by bankers in Jekyll Island. Alas, the monetary policy became centralized. The real test for such an arrangement came during World War I. Gold started pouring in from Europe in exchange for war goods. This strengthened the dominance of the dollar and led to other countries freeing themselves from the gold standard. This made US bonds and the currency more reliable. In addition, the Treasury issued “war bonds” that were marketed by the FED to commercial banks, and money was lent out at lower interest rates to help fund these bonds. Ultimately the FED became the fiscal agent of the Treasury and loose monetary policy was made possible. No public opinion, no consultation. Just a dire environment and policies on the spot created the recipe for tampering with the monetary base when needed and heading into a political framework.
The FED’s first recession:
With the monetary policy in control of the FED it was in charge of expanding the monetary supply when economic activity in the country expanded i.e. more trading, investments and growth and constrict the money supply when the opposite happened. As the dollar was now the main currency and its issuance wa sin the hands of a centralizeed party, problems had to rise. Speculation was increasing in the economy as people know the FED was backing the bonds and was willing to purchase them. However the gold backing, although not wholly, still existed so there was check and balance in the amount of supply. Who knew, this balance was what would put a constraint on major banks. When he governor of the Federal Reserve Bank of New York, George Harrison, raised the FED lending rate, it automatically reflected on the commercial banks which themselves had money loaned out in the stock market. This speculative bubble came to an end and things started crashing with the stock market down significantly leading to a crash on October 28th, 1929, marking it as Black Monday.
It is evident from this event that the FED now had to take care when detecting such type of equity bubbles and plan for a smooth landing. There hasn’t been any yet but the FED is now completely responsible for what happens The free market is suppressed and ponzi schemes and bubbles are inevitable.
An important consideration:
Speaking of Ponzi schemes, let’s look at an important event that happened before the recession where we saw maximum intervention by the FED. Young Ponzi, a boy with a dollar in his pocket and million dollars of hope stepped in American soil to chase after his spending dreams. What started in the summer of 1920 as an outright lie to investors claiming to make large profits through the arbitrage in reply coupon prices in mail posts turned out to be a complete pay Paul by borrowing from Peter approach. The promise of doubling your money in 45 days and the audacity by playing with people’s psychology led to the popular term ‘Ponzi’ we use today.
What is important to note, however, is the timeline from which the scheme was detected and caught. Less than an year and came down Ponzi’s company, the Securities Exchange Company (Ironically the SEC). This was all before the FED has stepped in and the SEC formation. This is a sweet example of how free markets and the money in the hands of people make it a job of the market to decide who lives not some mega bank or governmental organization bailing out companies.
The opioid crisis, Theranos, 1MBD, Enron and the latest FTX debacle that raised billions of dollars and managed to be on every headline which attracted masses towards their lies. Same lies, now they just have the monetary policies and the SEC there to keep them unexposed. If you want to learn more about them, the youtube channel ColdFusion explains them elegantly.
The FED now:
As it had been on the trajectory of reckless monetary spending and catering the fiscal policy of the government, the FED is now deteriorating. The dollar after it broke the shackles of being bcaked by Gold and the Bretten Woods made the dollar the world reserve currency, now the FED enjoys a much superior status. Not only does the US face effects of the monetary tightening but the whole world succumbs to it. Inflation fixing, the equity market runs lose. Fix that and then the labour market faces tension. It isn’t possible for a single entity to control all natural forces of economics. The government has to intervene where it needs to. That is providing organic opportunities not from monetary easing but rather through responsible investing. Why can’t the governments save, spend less, and invest wisely like any other individual worried of its fincnaces. But no, the greed for power and dominance led to the creation of the horrifying three letter agencies, the SEC, the FED, and the IMF which serve to cater self-interest rather than a healthy economy.
The 2008 financial crash that was a result of reckless monetary policies has not come to an end yet. The FED is incharge and the balance it has to maintain is quite delicate. This might not be in their control.
Bitcoin’s role:
Bitcoin is our new hope. Let’s talk facts instead of hopium.
Wealth was concentrated when the dollar was off the gold standard. There was no discipline. Bitcoin provides that and no one can tamper with that. It is simple and boring math and code.
The need for FED arose when we needed to establish trust. WHy trust the central bank when we have a single coin standing on its own independent formt eh others and securede by numerous nodes.
Isn’t a death spiral inevitable when a strict monetary base exists? Well, when people are connected through the internet and the economy runs by natural forces of supply and demand bubbles won’t grow that much and awareness would spread.
Bitcoin is the new monetary system. Building on it is the way ahead.
Hope you reached the end without being bored. Leave a comment if so.
Till next time.
Azeem, signing off.