Thomas Ray's Reviews > The Power and Independence of the Federal Reserve

The Power and Independence of the Federal Reserve, Peter Conti-Brown, 2016, 347pp, ISBN 9780691164007. Library-of-Congress HG.2563.C596.2016 College Library. Dewey 332.110973

A glimpse behind the curtain of an institution of power, secrecy, and proximity to private bankers in New York. pp. 203, 256, 262.

"If the people will keep their money in the banks everything will be all right." --J. Pierpont Morgan, 1907. p. 17.

"Will one of you gentlemen tell me in what civilized country of the earth there are important government boards of control on which private interests are represented?" --Woodrow Wilson, 1913. p. 21.

"Hard work means more production, but thrift and economy mean less consumption. Now reconcile those forces, will you?" --Marriner S. Eccles, 1932. p. 26.

"The airline safety board shouldn't be in charge of protecting the financial viability of the airlines." --Larry Summers, 2010. p. 243.

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has a one-in-five chance of putting the family out on the street." --Elizabeth Warren, 2007. p. 243. https://democracyjournal.org/magazine...

Interest rates climbed above 22% in 1981 and came permanently below 10% only in 1984, causing a recession, millions of jobs lost, businesses closed, ending inflation. p. 55. The author considers this way of ending inflation a "success" of Paul Volcker. p. 137. Volcker reduced the money supply, as Milton Friedman wanted. p. 234.

The Fed has bailed out "too-big-to-fail" banks since 1984. p. 57.

"Since I've become a central banker, I've learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said." --Alan Greenspan, 1987. pp. 61-62.

Alan Greenspan was a devotee of Ayn Rand. p. 63. "By the time I joined Nixon's campaign in 1968, I had long since decided to advance free-market capitalism as an insider." p. 64.

The benefits of risk taking in the market were for the participants; the costs were for the public. p. 67.

Paul Krugman was excluded for 10 years from the Fed's annual conference because of his criticisms of Alan Greenspan. p. 92.

The banks that join the Federal Reserve System must buy stock in the Reserve Banks, and receive a dividend set by statute at 6%. p. 104.

Obama failed to appoint three of the seven Fed governors--leaving private bankers' representatives with a five-to-four majority on the Open Market Committee. And he didn't appoint a vice chair for bank supervision. pp. 116-117, 247-251, 256. Biden is doing it too: https://www.brookings.edu/opinions/wh...

Reserve Bank presidents make federal policy without conforming to the constitutional requirements of presidential appointment and Senate confirmation. pp. 117-118, 255-256.

Federal courts refuse to hear challenges to the constitutionality of the Fed, "out of respect for Congress." p. 119. Courts refuse to review even those Fed decisions based on "novel interpretations of law." p. 253. Bankers' political power has thwarted congressional attempts to reduce their authority. pp. 123-125.

Economics exams' questions don't change, but the answers do. p. 129.

To raise the interest rate banks charge each other for overnight loans, the Fed sells short-term government debt, at the market price. To lower interest rates, the Fed buys short-term government debt, at the market price: pp. 131-134. By affecting the availability of money, the Fed changes the price of money. This interest rate is called the "federal funds rate." You'd think these are mostly money-losing transactions that add to the public debt. However, the Fed says it earned a net $88 billion in 2020 in interest on debt it held, most of which it transferred to the U.S. Treasury. p. 207 & https://www.federalreserve.gov/public... Table G.9. Senator Rand Paul in 2015 claimed, nonsensically, that the Fed was nearly bankrupt. p. 263.

The Fed creates from nothing the money it loans. p. 207.

The U.S. dollar has been a fiat currency since 1973. p. 210. Although the Constitution gives Congress power over money creation, few members found the details interesting enough to learn about the process. p. 215.

The Fed lends directly to banks at an interest rate called the "discount rate." p. 134. The Fed loaned $1.6 trillion in 2008. https://www.federalreserve.gov/public...

The Fed sets banks' "reserve requirements:" how much cash the bank must keep on hand: as of 2012, the largest banks had to keep 10% of "assets" in cash (smaller banks less). pp. 134-135. It's to meet these requirements that banks borrow money from each other over night. https://www.federalreserve.gov/public...
As of 2020, the reserve requirements are zero: https://www.federalreserve.gov/public... (Table G.3)

In January 2009 we were in a recession, yet the Fed had lowered the interest on short-term debt so near to zero that there was no reason to lend; no reason not to borrow--yet it didn't help. Still, 20-year and 30-year debt was getting about 3% interest. The Fed bought that debt too, to reduce long-term interest rates: in March 2009, it held nearly $2 trillion of it: still recession. The Fed bought mortgage-backed securities. By October 2014 it held nearly $5 trillion of debt (up from 0.8 trillion in 2008, still 4.6 trillion as of the writing of this book in 2016). This was called, "quantitative easing." pp. 140-145. The Fed had promised it would continue its free-money policy until inflation rose or unemployment came down. This promise was called, "forward guidance." pp. 143, 235.

[The book says not a word about it, but, though consumer savings-account interest went to and stayed at essentially zero, credit-card interest rates stayed up at usurious rates. Rents stayed high. Market-dominating corporations sat on and still sit on semi-infinite piles of cash, with no need to part with any of it; small businesses close, unable to compete with the gorilla. When the housing bubble burst, financial institutions that claimed to own mortgages, called the sheriff to put borrowers out of their homes, then tried in vain to sell those houses at much lower prices at lower interest rates. The original borrowers were never offered to refinance at the now-market price and the now-market interest rate. The jobs that eventually came back were worse jobs, at lower pay. https://www.federalreserve.gov/public... Funny how flooding big banks with public money didn't fix any of that. What banker would've proposed limiting mortgage debt to the now-current market value of the house, at the now-current interest rate? (That's all the bank can hope to recover after foreclosing.) Or, requiring a financial institution to prove it owns the mortgage, before foreclosing? What banker would propose a remedy other than giving banks money?]

A bank's "assets" include the loans it is owed by homeowners; its "liabilities" include the deposits that savers can demand at any time. p. 152.

The Fed and the Bush & Obama administrations picked winners and losers in the financial markets, in and after 2008. p. 157.

By 1932, 25% of all U.S. banks had failed. p. 160.

The Fed is supposed to examine banks and ensure their compliance with laws and regulations. In fact, a Fed bank-supervisor who doesn't act as the private bank's lap dog, is fired. pp. 164-170. The Fed failed to police the risky mortgage-backed-securities trading that led to the 2008 crisis. p. 228.

New York Fed president William Dudley was a managing director at Goldman Sachs for more than 20 years. p. 228. "The line between paying attention and taking direction is hard to draw." pp. 230, 256.

Clinton cut government spending at Greenspan's instructions. pp. 195-197.

The Fed releases transcripts of its meetings--/five years later/! p. 205. It gives /minutes/, with limited information, 3 weeks after the meetings. p. 231.

The market can stay irrational longer than you can stay solvent. p. 221. A banker lends an umbrella when it's sunny, and demands it back at sight of rain. p. 223. In 1998, hedge fund Long Term Capital Management made bad bets, threatening to collapse the financial system. New York Fed president William McDonough persuaded banks and brokers to lend LTCM money. pp. 220-224.

The total value of all the contracts in the global derivatives market in June 2007 was $516 trillion. Global GDP that year was about $50 trillion. Contracts were scrawled on scraps of paper by traders talking over the phone. What could go wrong? Then-New-York-Fed-president Timothy Geithner rounded the major traders up and persuaded them to upgrade to electronic trading. pp. 224-225. The 2008 crisis would've otherwise been worse. p. 229.

If the Taylor Rule is the best policy, don't amend the Federal Reserve Act; appoint John Taylor to the Open Market Committee. p. 265. (John B. Taylor, /Getting off Track/, 2009. https://www.goodreads.com/book/show/6... )