More Than a Helping HandOne of the basic functions of a central bank is to act as the 'lender of last resort'. This facility is used to keep banks liquid during a period of distress.
For example, if a bank is experiencing a run on deposits, it will borrow from the central bank instead of trying to liquidate some of its assets to raise the cash it needs to meet its obligations. In other words, the central bank offers a 'helping hand' by providing liquidity to the bank in need.
The following chart is from the Economic Research Department of the St. Louis Federal Reserve Bank. Here is the link: http://research.stlouisfed.org/fred2/series/BORROW. This long-term chart illustrates the amount of money banks have borrowed from the Federal Reserve from 1910 to the present.Take a look at the chart included in the article. Basically, banks have become far more dependent on the Federal Reserve in the past couple years than ever before. The thing to worry about is where this money comes from: out of thin air through a printing press, as well as taxpayers. A central bank put together with a fiat monetary policy is flat out dangerous yet very few people today even know how the Federal Reserve works and what type of monetary system we have today. Why have people given every ounce of trust to an unaudited organization with the tremendous power over money, credit, and interest rates? I don't think for a second that people truly understand how this system works.
All sorts of wacky excuses have been made up for what inflation is and what causes it. The idea that increased economic production, or too much production as the case may be, is bad for the economy is beyond ridiculous. It's the creation of the money, the dilution and debasement of the dollar, that is harmful to the economy. Increased production naturally would drive prices down, not up. However, if people really understood this basic lesson of free market economics, those at the Fed would have a very difficult time explaining why they are needed to "keep the markets stable." The "business cycle" is nothing more than the consequence of manipulated interest rates from the Fed. Sure, there may be other factors, but the root cause of the "business cycle" is the decisions made by the Fed.
A central bank by itself is dangerous. What's far more frightening to me is the fact that the Fed is getting more powers and abilities to regulate financial institutions. Over time, the Fed has been getting
more trust from politicians (understandably, given how convenient it is for politicians) and continues to go unaudited and unchecked by nearly a soul. While a central bank itself is dangerous, a central bank with increased, unchecked powers is just plain dangerous, outrageous, and scary at the same time. I know I've written continually about the Fed and monetary policy over the past couple weeks and likely will continue to do so going forward. Simply put, I am convinced that the Federal Reserve is a huge threat the economy over the long run. In the short-term, all these great bailout packages where everyone shares the joy and no one fails may indeed sound terrific, but the long-term harm done to the dollar will come back to hurt us. A sound, steady currency is essential to a strong free market system and economy, not a strong central bank. On top of this, for some reason very few people will look back at history and see that this type of system has been tried many times before, not one of them being successful.
It is time that people research monetary policy rather than take it for granted like we have done for years. Even though the amount of people who understand this issue is quite small, I'm confident that it will continue to increase over time and eventually become a key issue and question in economics. At the very least, it will get some good discussions going in the future.
Tags:
banks, central bank, currency, dollar, federal reserve, fiat money, monetary policy
Posted at: 08:32 PM | Add Comment
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