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May 17, 2010

A Response to Reader Comments on the Federal Reserve

 Friday’s article caught the attention of a variety of readers and several comments were made regarding the Federal Reserve, the monetary system, and my proposal for the Fed.  I wanted to share some of the comments made and my response to each of them.
From an observer at the Common Sense Movement:
How do you arrive at the conclusion that a recession is tied to lending? Everyone loves to point to the bailouts as essential because they provided much needed credit to the consumer. What the hell do we need more credit for? It was the over spending of borrowed money - initiated by the fed - that created the crash in the first place.
A credit bubble creates a credit crash, as you have stated.  I do not support the bailouts and I believe (as we are starting to see with portions of TARP) that they were unnecessary.  However, we must have some access to liquidity when a crunch or crisis occurs.  Therefore, when a credit crunch occurs and a AAA company needs to borrow, do we simply allow their operations to cease as they look for credit?  I’m not advocating the creations of trillions, but I am advocating the temporary availability of credit to those who are worthy of it during times of crisis.
Bottom line is you need something to stabilize the money supply... The founders knew this and is why they gave only the Congress the power to coin legal tender - backed by gold and silver. The proposal to "Eliminate Senate confirmations." is ridiculous.
You want an independent, private corporation, owned by the largest banking cartels in the world, to essentially control the United State's economy for the benefit of 'we, the people?' Give me a break! The entire idea of the Fed is for the banking elite to hold us in debt to them for eternity, and pass wealth from the lower and middle class up to the top.
Many other countries, namely Argentina, have had the powers expressed in the first paragraph.  Unfortunately, with leadership similar to what we have right now, debt can be monetized at the passage of a vote.  The government should not have anything to do with the money supply besides the functions of the treasury to create the physical bills and coin.  To the second paragraph, I prefer private regulation over that of the government.
First, he (Freidman) claims the Fed had a responsibility to provide liquidity and prevent the run on the banks... Maybe so; however, I would argue that they also had a responsibility to never allow the fractional reserves to get so far out of control - to a point where such a loss was possible. Why criticize the response, when you should really look at the root cause of the problem?
I totally agree.  That’s why I advocate the monitoring of fractional reserves and the gradual lowering of the reserve ratio requirement.  The reason this is not happening is because the Federal Reserve is too focused on consumer protection, unemployment, trading distressed debt, and the balance sheets of banks.
The Federal Reserve brought all those bad assets to bail out Wall Street and not to improve credit market. The only credit market that has improved is the fact that the banks can get interest free loans from the Fed at the expense of the US taxpayers. The people on Main Street are still having a hard time getting a loan from any bank. Why is that?The Federal Reserve created a debt based system. When the government needs money, then they will get the Federal Reserve to print money and lend them the money. The government pays back the loans through raising taxes. This mean less money for American to pay expenses and consume. The system is great for the bankers, bad for Main Street.
I agree.  The problems involve the fed marrying itself with the banking industry and the federal government.  While my plan does not totally solve those issues, I believe it is a good start.
Runs on the bank are good. If the bank took excessive risks with its depositors’ money and they don't have adequate cash reserves, they deserve to fail!
Runs do not occur only with bad banks, they occur with all banks.  So, if you decide to bank with a responsible entity and a run occurs, do you deserve to lose your deposits as a result of some other bank’s irresponsibility?  I believe today’s video (below) illustrates that point.  Watch the last minute of the video which illustrates how a gold standard and the Federal Reserve can exist together.

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