lr, true, the Jekyll Island story is not well known. Nonetheless the clip makes it out to be more sinister than it is, and contains misinformation. The Fed cannot properly be described as a private institution (though it's not exactly a government institution either). It's not fair to say it operates entirely without oversight (although its autonomy is great). And the Fed most certainly does have reserves; in fact it creates them.
It's true that normal accounting rules do not apply to the Fed. The dollar bills in your wallet are your asset, but on the Fed's balance sheet they are a liability. The bonds issued by the Treasury are debts of the United States, and assets of the Fed. Weird, yeah, but this is a feature of all central banks.
Why have a central bank? The motivation for the Federal Reserve was the Panic of 1907. J. P. Morgan orchestrated the bailout then; better to have at least some oversight. Central banks exist to prevent irrational panic: runs on solvent financial institutions which will freeze credit markets and hence the larger economy.
Properly run, they observe Bagehot's dictum: lending freely to solvent institutions, at a penalty rate. This is eminently sensible and a central bank which adheres to it is a damned fine and proper thing to have in any free country with a free market, IMO.
And so the question is: in the panic of 2008, to what extent did the Fed actually follow Bagehot's dictum? And if it couldn't be followed, then why not? And what has been done since? And how has the role of the Fed expanded beyond the mandate to quell panic, and is this a good thing?
There is much to criticize here, but the mere existence of a central bank in the US is not a scandal.
lr, true, the Jekyll Island story is not well known. Nonetheless the clip makes it out to be more sinister than it is, and contains misinformation. The Fed cannot properly be described as a private institution (though it's not exactly a government institution either). It's not fair to say it operates entirely without oversight (although its autonomy is great). And the Fed most certainly does have reserves; in fact it creates them.
ReplyDeleteIt's true that normal accounting rules do not apply to the Fed. The dollar bills in your wallet are your asset, but on the Fed's balance sheet they are a liability. The bonds issued by the Treasury are debts of the United States, and assets of the Fed. Weird, yeah, but this is a feature of all central banks.
Why have a central bank? The motivation for the Federal Reserve was the Panic of 1907. J. P. Morgan orchestrated the bailout then; better to have at least some oversight. Central banks exist to prevent irrational panic: runs on solvent financial institutions which will freeze credit markets and hence the larger economy.
Properly run, they observe Bagehot's dictum: lending freely to solvent institutions, at a penalty rate. This is eminently sensible and a central bank which adheres to it is a damned fine and proper thing to have in any free country with a free market, IMO.
And so the question is: in the panic of 2008, to what extent did the Fed actually follow Bagehot's dictum? And if it couldn't be followed, then why not? And what has been done since? And how has the role of the Fed expanded beyond the mandate to quell panic, and is this a good thing?
There is much to criticize here, but the mere existence of a central bank in the US is not a scandal.