Can I Please Have Short Tutorial On The Fed?

[Paulie]

They profit from the interest they get, from the "money" they print up out of thin air and lend.

Nice work, if you can get it.

That is a lie. The FED does not print money, and they deposit the interest in the Treasury for the government to use.

How many fucking times do you have to be told that when people say "print money" in regards to the Fed, they don't mean LITERALLY print money?

 

[Zander]

Board of Governors of the Federal Reserve System

 

[Baruch Menachem]

The Federal reserve acts as a bank for banks. As you note,it does wire transfers, reconciliation's, and other back office transactions.

In order to understand the fed, you have to understand the concept of fractional reserve banking. Essentially, a bank loans out most of its money, and only keeps a fractional reserve in "cash" loosely defined. (Cash in this case also includes things like deposits at other banks including the federal reserve and US government securites)

In order to be in business as a federally chartered bank, you have to be a member of the Fed, which means 6% of the value of your deposits is "invested" into the fed as "stock." The counts as part of your "cash" reserves. You are obliged every wednesday to report the value of your deposits, and the amount of "cash." YOu are obliged to keep a certain percentage of the deposits as a reserve. This percentage has been declining over the years due to technology and other reasons. Originally it was 21%. I believe now it is around 16%. If you don't have enough money to meet your reserve, you can borrow from another bank, or the Fed to meet the obligation. The rate at which this money is loaned is called the Federal funds rate. It is pretty much defined by the Federal Reserve. While there is no assigned penalty for borrowing from the fed, they note who does it, so most banks trade with each other for federal funds.

The other function of the federal reserve is the Sales Agent for the treasury of the national debt. The federal reserve, as a bank, buys US government debt for its own account as well.

When the Federal reserve sells debt out, that has the result of shrinking the money in circulation. When it buys debt, it increases the money in circulation. When the federal reserve just issues cash for US government debt, that increases the money supply.

By buying and selling debt, the government changes the money supply, which affects the prices of all commodities. More cash with the same amount of goods means the goods go up in price. Less cash, prices come down.

The fed is the single largest player in the US government debt market. Think 800lb Gorrilla and all the big national banks as mice or fleas.

The Fed's official role is a back stop bank for all the other banks. The concept was that there would be fewer panics and less of a roller coaster ride for the economy with a large enough central bank to deal with runs and panics.

The record of the fed in this regard, the job they are supposed to do is, to put the best possible face on it, dismal. In 1929 they were actively forcing banks out of business due to inflation fears. As each bank failed, the value of their deposits went out of the money supply. Crashing banks meant a crushing depression. Their record since then has only gotten better, but only by comparison.
Panics prior to the federal reserve didn't last long, and were never very deep. The period from 1929-1940 was just the harbinger for the record of the fed since then. And what has happened since 2008, where we are nearing the third anniversary of the crash shows that the record of the fed in continues its usual course.