It was born on Christmas Eve in 1913—with barely a quorum in attendance. And it grew to be the greatest engineer of unintended consequences ever.
That night, Congress passed the Federal Reserve Act and gave birth to this country’s third central bank (there were two before that didn’t work out so well).
The “Fed” was established to stabilize the economy. It was claimed it would “benefit commerce, the public, and the nation; it would lower interest rates, provide funding for needed industrial projects, and prevent panics in the economy.”
At least that’s the story they wanted you to believe.
Its proponents cited the crash of 1907 as absolute proof of the need for a central bank.
The reality was less magnanimous. The bankers who created the Fed were looking for a means to cover their own backsides when one of them got out of line.
It was designed to keep banks from squeezing reserves too aggressively—keeping too little cash on hand—when it came to making loans, thereby avoiding the “cash drains” that would ensue within the banking system. (Prior to 1913, “cash drains”—cash obligations that had to be paid between banks—was the No. 1 reason for bank failures.)
So they created a cartel to manage the entire system. And they dubbed it the Federal Reserve Bank. Why that?
Because that sounds a lot better than “The Private Banking Cartel Run by a Small Cabal of Billionaire Investment Bankers Looking to Maximize Banking Profits While Pushing Risk Onto Unsuspecting Third Parties.”
It’s also easier to remember.
A Track Record No One Would Be Proud Of
Despite its (self-proclaimed) mandate, preventing crashes was never something the central bank got the hang of. They were at the wheel when panics and crashes happened in 1921, ’29, ’62, and ’87 to name a few.They were equally inept at stabilizing the economy, overseeing the depression of 1929 as well as recessions in 1953, ’57, ’69, ’75, ’81, ’90, ’01, and let’s not forget 2008.
Yet despite that track record, in reality, Fed officials cling to and continue to push the myth that they can manage the economy. The brain trust of the Federal Open Market Committee convenes behind closed doors. And they deliberate on whether to move rates up or down by one-quarter of one percent.
This is supposed to manage the economy?
Their real mission has been to feed their member banks more and more money faster and faster to keep their bottom lines growing, and that has pretty much screwed the entire economy and financial system.
The 40-year march toward zero interest rates hit a wall in 2008—when they hit zero. From there, all the Fed could do was print money and call it something impressive like “quantitative easing.”
The Truth They’ll Never Admit
Markets are brutal, painful things. They don’t care about your feelings if you’re wrong, whether it’s buying a stock or starting a business.If the market were allowed to function during the financial crisis in 2008, way more banks than Lehman Brothers would have gone belly up. (You can argue the Fed saved the day, but if it weren’t for the Fed, things wouldn’t have gotten that far out of hand in the first place.)
Mean, sure, but efficient. There’s no more efficient mechanism for advancing broad prosperity in the world.
That the Fed can do this better than the market is utterly preposterous. It has no clue. It can only try to hand out more money to its banking partners when those partners make a bad choice, and then try to siphon off some of that money when it starts heating up inflation.
Today things have reached a breaking point.
Lately, and by “lately” I mean since 2008, the Fed has been dousing the markets with a firehose of money.
“Siphoning” is not an option. It’d be like trying to bail out the Titanic with a teaspoon.
Nope. Now the Fed is facing a monster that’s about more than too much excess capital in the system.
Now there’s a wage component to inflation, and a supply-chain component as well. This current price surge has all the marks of turning into a decades-long secular monster much like the United States endured in the 1970s if the Fed doesn’t take some serious action. Announcing a 25-basis point hike ain’t it.
They’re going to have to slam on the brakes. Opponents of this idea will say that would crash the market as well as the economy. That’s one way of saying it.
Another way is the Fed needs to let the market fix itself.
That’s a tall order where the defenders of elite prosperity are concerned. It’ll take the kind of courage former Fed Chair Paul Volcker had (rest in peace), and frankly, I don’t know if anyone on the current Fed has it.
But here’s the reality: If they don’t do it, it’s going to happen anyway.
If they don’t take a definitive stand against the wave of inflation—even at the risk of putting the market into a tailspin—they risk losing control over any and all inflation expectations. When that happens, prices will skyrocket enough to cure “the problem of high prices” on its own. And it’ll be way more painful.
Right now, it’ll be like pulling that Band-Aid off your 6-year-old’s knee—actually, it’ll probably be worse—but it needs to be done.
If recession seems imminent, it’s time to start looking to defensive industries, including food and staples, biotech, and utilities. Funds like the Invesco Equal Weight Health Care ETF and the Utilities Select Sector SPDR Fund represent these industries and are solid performers.
