This is Breaking The Dollar, the podcast that dismantles some of the biggest misconceptions about money. Presented by Gainesville Coins.

Welcome back to Breaking The Dollar. I'm Everett Millman, your host and today's episode is going to revolve around the Fed, the Federal Reserve. What is it?

We're going to discuss some of the criticisms of it, where it came from and why you should be paying attention to what the Fed is doing because it does impact all of us.

So contrary to it's name, the Federal Reserve really isn't that federal.

It has connections to government, certainly it is a creation of congress and it has some political implications, but the name is misleading.

And if the first word out of a person's mouth is a lie, then it's really hard to trust everything they say after that.

So the name alone of the Federal Reserve makes it sound like it is purely a government entity and that is not exactly correct.

It's actually a consortium of private banks, meaning it is a group of privately owned for profit banks that all work together and are part of the same system that has some oversight and some connection to government.

But really what you need to know is that the Fed is by the banks, of the banks, and for the banks.

It really is a creature of Wall Street.

Now when we talk about regional banks, the 12 regional banks of the Fed, these aren't like the Bank of America on your corner.

It's not a regular bank that you can just walk into and open up an account. Really it is the definition of a central bank.

It is a bank for other banks.

And here's where the connection to government comes in, is that the Fed is the banker for the US Treasury.

Like I said, some of these connections to the government are kind of loose.

So the president gets to nominate the members of the Federal Reserve Board, the group of individuals who make the voting decisions about what our monetary policy should be, and then those nominees have to be approved by the Senate.

Congress does pass laws that tell the Fed essentially what to try and do. It doesn't really mandate how the Fed accomplishes that or how the Fed implements its policies, but congress has something called the dual mandate for the Fed.

That basically means we're giving you two jobs and those two jobs are

A. Price Stability B. Maximum Employment.

So what those mean is they want to have unemployment at the lowest rate possible and they want to have low inflation. That's what price stability means.It means that the dollar will buy roughly as much tomorrow as it does today and so on and so on.

Now the Fed has various tools or mechanisms they use to try and achieve these two goals, but that isn't to say that they're always working in the interest of the entire overall economy.

Really, I have something I want to get across to you as the listener is that the Federal Reserve really is beholden to Wall Street.

It acts in the interest of Wall Street when you hear about interest rates and are they going to hike interest rates or cut interest rates.

Those types of policies take a year or more to have an impact on the broader economy. But they are very important to Wall Street, in the moment.

Expectations about where interest rates are going to go have widespread ramifications for the credit markets and for banks in general, for financial institutions.

So a lot of what the Fed does is managing the country's banking system. Everything it does, it does so with Wall Street in mind, and this is one of the issues of the whole concept of central banking and centralized economic planning in general.

And really it's a problem with the entire economics profession that markets are made up of human individuals and it is very much based on psychology and behavior and it's many, many moving parts and factors that are difficult to predict.

Now what central banks like the Fed do is they have models and equations and theories that they use to try and forecast and predict what a given policies impact will be on markets.

But like I said, markets are not some cold dead calculation on a chalkboard or in a computer. It's not so easy to get people to do what you want them to do because there's just way too many people acting in the system.

There's way too many participants in markets that have different interests and different goals.

And this is not just a criticism that I made up there. There's a long tradition in school of thought about why central banking itself is a difficult idea to implement and that it often ends in failure.

So some of these problems that the Fed and central banks in general had been criticized for, we really needed to take a step back and go back to the origins of the Fed to you understand what kind of system would we have without centrally planned economic policies?

So the Fed was created by Congress in 1913 but that's not where the idea came from. Unsurprisingly, it was actually a group of Wall Street bankers who got together and decided on the framework for this system prior to having a central bank throughout the 19th century and into the early 20th century, the United States and much of the world had a system that's called free banking.

And basically that means that banks were not nearly as tightly regulated and they could issue basically whatever type of money they wanted. And it was up to the free market to decide if that money was trusted and was going to be used and be successful.

Now, by no means am I advocating or saying that free banking is a perfect system, even when it was in effect and it was attempted.

There are definitely drawbacks to having so little regulation.

There was a phenomenon called wildcat banks where banks were just popping up all over the place and nobody really knew whether they were legitimate or reputable or could be trusted.

So there is a drawback to free banking, but it avoids one of the main problems of the Federal Reserve.

And that is that concept I was talking about before attempting to predict human behaviors that are too complicated and too influenced by too many different factors to really control the market that way.

And so again, to circle back to the longstanding criticisms that many experts have had of the Fed, they're always working to keep the economy in boom time as long as possible.

And so they engage in these kind of counter cyclical policies.

If it goes back to a strain of thought that's called Keynesian economics, that when the economy is doing well, you're supposed to raise interest rates to kind of put the brakes on everything to supposedly take away the punch bowl just as the party is getting started.

And ironically enough, it was actually a chairman of the Fed who came up with that quote in the 1950s and sixties. Conversely, when the economy is doing poorly and you're anywhere close to entering recession, the Fed typically lowers interest rates to try and kind of keep the party going and keep businesses propped up.

And this has had very negative effects time and time again, that people have rightly criticized central banks for this type of behavior.

It often leads to asset bubbles being blown, which was a topic from one of our previous episodes. And it is somewhat strange that we never seem to learn from this recurring mistake.

And personally I think it's because most of us do not pay attention to the Fed. I think a lot of listeners probably didn't know what the Fed was before you turned on this podcast and that's not a knock on you.

I think the vast majority of Americans are not aware of how our monetary policy is decided and who decides it.

So I want to kind of transition now from the history of the Fed to why you should be paying attention to it now. Because for all of these recurring mistakes that I brought up, we're really in uncharted territory with the extreme version of that story.

Where after the last financial crisis, the Fed and in turn other central banks around the world have engaged in unprecedented and untested monetary policy measures that are extreme versions of what I'm talking about.

So instead of just lowering interest rates, the Fed slashed them to nearly zero, which is a pretty unprecedented move in American history.

And this did have the effect of keeping certain financial institutions and companies afloat, but we've never taken away the punch bowl.

A good analogy is someone who becomes addicted to painkillers or an opium addict.

At first it does lessen the pain, it does have some palliative effect, but that's only a temporary solution and you have the problem of dependency where it takes more of that type of stimulus to get the same effect to eventually you're getting no return.

And that's the situation we're beginning to see now that for 10 plus years, the Fed has kept a lot of these easy money monetary policies in place to try and keep markets elevated, but they've never gone back the other way. They've never been able to normalize policy again.

And a lot of people, they use the shorthand, money printing for what the Fed does in this respect.

And that's sort of a misnomer because they don't actually really have to turn on the printing presses and print a bunch of dollar bills.

That's not what happens.

Like I said earlier, the Fed has these different tools and mechanisms with inter banking rates, which is you know, an interest rate that banks can lend to one another.

There's another tool called the interest on excess reserves that the Fed will pay to member banks to keep their extra reserves at the Fed. Thus thereby adding liquidity to the system.

It has a lot of these other tools and one of the main ones is called quantitative easing.

And really that is just a fancy way of saying increasing the money supply.

But that had never been done to the extent that it was in the wake of the crisis. It never been tested to the extreme measure that it still is basically to this day.

And thus the effects of this policy are not perfectly understood even by the economists at the Fed and the policy makers who came up with and implement quantitative easing.

That's a dangerous precedent to set because going back to my initial criticism that the Fed is trying to control and manage things for which it cannot make very accurate predictions. It cannot control the behavior of markets.

So we don't know what the consequences are going to be. And one of the recurring themes of this type of cycle of easy monetary policy to pull us out of a recession is that the more extreme we go to try and stimulate the economy, usually there is an equally extreme snap back the other direction.

So that means the downturn is going to be worse.

And that is the risk with having centralized policy making in general for the economy is that it's naive for us to believe the Fed is truly independent of politics.

Besides the structure of the political appointments and the approval by the Senate, we're seeing increasingly now that politicians and the White House and all sorts of people who are in Washington are trying to influence fed policy and that has a real effect when you place enough pressure on human beings, they do respond to political pressures.

So, not only is it perhaps a futile effort to even try and have centralized monetary policy, but when you throw in the political pressure factor, it's seems like a recipe for disaster.

And it seems like we're not going to have a fed that's making decisions in the interest of main street.

It's going to be making decisions that are in the interest of Wall Street and Washington.

And we've seen how that usually plays out.

So now that we're wrapping up, let's take another question from our listeners.

And this one comes from Justin in Branson and Justin asks:

Does the Fed buy stocks?

I like that question because, no, not necessarily. The Fed does not just speculate on the stock market. Some central banks actually have been doing that in Europe and Japan, but it brings up a related topic and that is the Fed has a very big balance sheet. It has assets and liabilities and one of the main components of that is its bond portfolio.

The Fed buys lots of bonds and if you look at the makeup of its balance sheet right now, because we were talking about how, the Fed has been engaging in stimulating and propping up markets.

One of the biggest ways in which this was done following the financial crisis was that the bought up a lot of toxic loans and toxic debt and that means mortgage backed securities, which is one of the big boogie men of the financial crisis. It was one of the main kind of risky assets that caused the system to be under such stress and caused such panic.

Those mortgage backed securities still make up a huge chunk of what the Fed holds in its balance sheet. It's like 40 to 50%.

It has really never been able to roll those out of its balance sheet.

And one of the reasons the Fed does this is that it fulfills the role by being the country central bank as it fills the role of being the lender of last resort.

So it is supposed to step in and essentially bail out its member banks and other financial institutions or any government institution when they're in financial distress.

So in that sense, yes, the Fed does buy up assets, but as far as I know, it does not buy up any actual equities from the stock market.

So that's a great question. Always appreciate hearing from the audience.

Thank you for listening.

Be sure to join us on next week's episode where we discuss the gold standard and how slowly but surely more and more people are talking about the benefits of owning gold. So don't miss that one. It's going to be interesting.

Today's episode was presented by our sponsors, Gainesville coins. You can find out more at

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The views and opinions expressed on this show are for informational purposes only and should not be used or construed as professional investment advice.

Posted In: podcasts
Everett Millman

Everett Millman

Managing Editor | Analyst, Commodities and Finance

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in Reuters, CNN Business, Bloomberg Radio, TD Ameritrade Network, CoinWeek, and has been referenced by the Washington Post.