The Expanding Role Of The Federal Reserve.

Today, many remain concerned about the great concentration of wealth and influence that the Federal Reserve Board wields today. Beginning with the Great Financial Crisis of 2008, it has been the Fed which has become the chief weapon used to stave off recession. Almost over-night it has become accepted economic doctrine that the Fed's new strategy of “stimulating” the economy through vast purchases of financial assets would somehow translate into increased economic activity. And thereby stave off a recession or depression.

Well, 113 years ago this month, the Federal Reserve, the Central Bank of the United States was created by an act of Congress.

Then, as now the Fed was wrapped in controversy. Representatives from around the nation were concerned that this new central bank would retain to much power and influence for the moneyed interests on Wall Street.

Representatives Robert Lafollette and Charles Lindbergh Sr., whose son became the first man to fly non-stop across the Atlantic. Lafollette and Lindbergh were both adamant that the “Money Trusts” would gain too much control over the nation's finance. That they would control interest rates, and determine who banks might lend too.

Money Trusts had become infamous as a tool used by the very wealthy to gather great sums of money, that were used to manipulate the stock market. By using these “Trusts” or sometimes called investment pools, rich speculators would run the price of a stock up, encouraging unsuspecting investors to buy the latest “hot” stock. Only to see it drop like a rock in price when the Trust went to dump the stock.

It was an unscrupulous strategy, which was later outlawed under the great Financial Reforms of the 1930s and 1940s.

Today, many remain concerned about the great concentration of wealth and the influence that the Federal Reserve Board wields today.

Beginning with the Great Financial Crisis of 2008, it has been the Fed which has become the chief weapon used to stave off recession.

Almost over-night it has become accepted economic doctrine that the Fed's new strategy of “stimulating” the economy through vast purchases of financial assets would somehow translate into increased economic activity. And thereby stave off a recession or depression.

The origins of this strategy, go back to a speech given by then Professor Ben Bernanke before the San Francisco Fed. In the speech Bernanke advocated flooding the monetary system with liquidity, so as to avoid the type of deflation that we suffered back in the 1930s.

In other words he was telling the central bankers, that the way to fight deflation was by dropping dollars into the financial markets.

This speech became known as Bernanke's “Helicopter” Speech. The one in which he was recommending just dropping money out of a helicopter, if needed, to help save the economy.

And essentially, if you look at the Fed's behavior since then, that's exactly the path they've followed. Pumping an unheard of funds into the nation's financial systems. At the latest reading, the Fed's Balance Sheet has now ballooned to over $7 Trillion Dollars, up about $3 Trillion since the Covid Pandemic began earlier this year.

But just how do you put that much money into the financial system? It's an interesting question and one which the fed has had to struggle with.

In the beginning, the Fed bought primarily US Treasuries. That resulted in the Fed having T Bonds and Bills and Notes, on it's books, while the funds went out into the system. But pretty soon the Fed's position became so large, that it was beginning to have an impact even on a market as large as US Governments.

So most recently, the Fed has moved to begin purchasing Corporate Bonds. And that's where we are today. A strategy that is only a couple of months old.

Next Tuesday and Wednesday the Federal Open Market Committee will meet, and the chief topic of that meeting will be the expansion of this very new tactic of purchasing corporate bonds.

It is a move that promises to enhance the Fed's influence over the nation's economy. As the Fed continues to expand its influence at the same time it expands its balance sheet.

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Start listening to The Week Ahead: June 21 - 25.
7:17
Start listening to The Week Ahead: June 21 - 25.
7:17