Fed v Congress v Bankers

11/15/15 by Martin Armstrong

QUESTION: Don’t you think it is wrong that the private banks own the institution that administers them.

ANSWER: You have to understand what was intended. It was originally a bailout entity for banks so they had to fund it. That made sense initially, Then with time and circumstances, the Fed has morphed into something that is now some quasi-political-governmental-agency that nobody would have created from the outset.

I do not think the Fed should be owned by the Treasury since then politicians will control it for political purposes. I can hear it now: “Vote for me and I will give free interest on credit cards!” I do not think in its present form it should be owned by banks collecting 6%. I would advocate a public float as is the case in Switzerland.

My point is the politicians keep changing the Fed and relieve themselves of ALL fiscal responsibility for economic booms and busts and blame the Fed, which is wrong, since they are the primary cause of aggravating the business cycle.

I do not advocate conspiracy theories against the Fed or criticism of exclusively the Fed ignoring the role of Congress. To solve the problem we MUST look at the whole. You need a central bank to clear. Bank failures were because of relationship banking where they borrow short-term and lend long-term. Elastic money made sense under the idea you did not have to liquidate loans to repay depositors in a panic. The elastic money would expand during a panic and then contract when over.

Now that banks are doing transactional banking and not holding long-term loans on their books, then they no longer need elastic money or bailouts and should collapse when they screw up. They should be held for CRIMINAL prosecution if they are trading with other people’s money. You cannot have it both ways. If the Fed is to stimulate, then they should buy corporate paper, not government, and then the money is directly injected into the economy whereas currently the banks still refuse to lend money long-term.

The Fed is caught between politicians and bankers. That is not a very nice place to be these days. We will have to REFORM this position after the crash, but eliminating the Fed will create chaos and it will not solve the problem as long as Congress has any power to create debt and the big banks moved to transactional banking abandoning relationship banking.

http://www.armstrongeconomics.com/archives/39342