I have to address a few common misconceptions about the Federal Reserve.
1. The Fed is *not* giving “handouts” to banks. What’s happening is that banks are holding all these junk bonds that they can’t sell, because they’re junk. The Fed can’t use those as collateral because, well, they’re junk. What the Fed *is* doing is taking those bonds and trading them for Treasury bonds, then having these banks use the Treasury bonds as collateral on loans (which the Fed just extended to 90 days). These loans are paid back. It is not a handout, the Fed is simply loaning money under conditions that it usually wouldn’t.
2. The Fed is not backed by taxpayer money. When the Fed loans out money to banks as described above, there is no taxpayer money involved. Essentially what happens is that the Fed takes some money out of its reserves and puts it in circulation. It’s basically increasing the money supply and putting new money out there. Again, let me reiterate- The Fed does *not* take your money.
3. Yes, the Fed increasing the money supply causes inflation (theoretically), which decreases the value of your money. There are two types of inflation. Demand-pull inflation is caused by too much money chasing too few goods. This is what cutting the federal funds rate (increasing the money supply) creates. This is what the Fed tries to control. On the other hand, cost-push inflaiton is caused by a sharp, sudden increase in the price of a cornerstone good to the economy. This is what happened to the U.S. in the 1970s during the oil crisis, and this is what is currently happening to China because of rising food prices. The U.S. is also sucesseptible to cost-push inflation, especially with rising oil and food prices. Not everything can be attributed to the Fed.
4. The Fed’s increasing willingness to help out financial institutions is neither socioeconomic favoritism nor self-interested manipulation. If the Fed failed to help major banks, these banks would fail, causing the entire financial infrastructure of the U.S. to fail. This is what happened during the Depression.
5. Ben Bernanke does, in fact, know what is happening. Before he was Chairman of the Federal Reserve, he was a very involved scholar of the Great Depression. A collection of his essays can be purchased from here or can be found online with a bit of searching
I hope this puts an end to at least *some* of the irrational anti-Fed sentiment that’s been circulating the internet. I’m looking at you, Reddit.
