Tuesday, January 31, 2012

Who's Afraid of the Fed?


My father asked me to do a post on the Federal reserve because he'd heard some of the conspiracy theories about it. So I did some research. Ron Paul wants to get rid of it--he suggested a return to "Honest Money" (the Gold Standard) and people are saying the Federal Reserve is a rogue entity, control the US Money Supply from its shadowy fortress. What is it? How does it work? Is it ... out of control?

The Federal Reserve Bank 
The Federal Reserve System is the term for the central banking system of the united states. Almost all nations have some kind of central banking system and this one is ours.

How Does It Work?
It's like this--the Fed, through 12 Federal Reserve Banks around the country sets the interest rate for loans to major banks thereby controlling the supply of money to them and thereby the nation. As this money is, yes, a loan, it gets repaid by the banks with interest--and therefore makes a profit. Furthermore, as it issues stock which is owned by those banks ... it's ... well, is it a PRIVATE company? Making billions of dollars in profit?! With NO congressional oversight!? And maybe all that stock is owned by the Rockerfellers and Rothschilds and what-not. Overseas foreigners? The Illuminati? This thing has to be stopped?

To Start With? 
No. The Federal Reserve does issue stock--but it isn't even remotely normal stock. Stock holders (the huge banks) don't control it with those stocks. It may not be sold, traded, or used as collateral for a loan. Dividends are fixed by law at 6% per year. Secondly the Fed does make a profit. A big one. Like 24.9 billion dollars last year. Isn't that a conspiracy? Only if you leave out that it paid 24.5 bn to the US Government. The rest went to the banks as their dividends and operating expenses. Horrors.

What about NO OVERSIGHT!? Uh. No. Congress controls and audits the bank. It is true that it does not need to seek permission to take action (set interest rates, etc.)--but it can have it's mission changed and controlled by Congress. The President can't remove the chairman--but most capitalist economies have fairly autonomous central banks. And they work most of the time. Who appoints the Fed Chairman? A shadowy force from Indonesia ... President Obama. If you're gonna buy into one conspiracy theory you might as well buy into all of them.

What's The Conspiracy?
So I'm going to take a minute here to talk about two things: What/Why people hate the Fed--and then how to think about things if you find that you've bought into this. Dad, if you are reading this, read them both.

Why Do People Hate The Fed?
There are several reasons to hate the Fed--but it cones down to two of them. The first is that since the US moved from the Gold Standard (which, by the way, the existence of the Fed pre-dates) the fear has been (in some quarters) that we would spiral into hyper-inflation in an orgy of printing dough. The Fed is actually there to stop that--but some people have never gotten over it. The other reason people hate it is that, going way back, there is a belief that the bible prohibits fiat money (money that is not backed by gold) and is "dishonest." The actual passages that support this are all about not using tricked scales to cheat people--but it gets evolved into a hatred for all kinds of complex money tricks. This echoes what we see today in "Islamic banking" where the products have to comply with fundamentalist Islam to be sold to the believers.

How Do I Stop From Believing This Stuff?
Today there is a vector for conspiracy theory that is unlike any other: the Internet. How is a person to know if information they are being told is true or not? How can you be sure anything I wrote up there is true or not? I had to wade through several pages and, ultimately, had to take the word of the website of the Federal Reserve itself to an extent in the end. I also used Wikipedia--and anyone can edit that. So how can you believe what I wrote? Well, I believe it because I've read all kinds of shit on the Internet and I have a good sense for conspiracy theory. But what if you don't (or what if I'm wrong?).

Here's what you need to do: Apply Ockham's Razor--that's the philosophical tool that says "The simplest answer is preferred." Conspiracies are complex things--a shadowy government organization that makes billions of dollars selling money to the US when we freakin' print our own money doesn't make much sense. The idea that Congress would allow a group that could set the prime interest rate to exist without oversight would be, well, shocking.

This goes for 9/11 conspiracies too: a government plan involving scores of people (demolition squads, planners, controllers, etc.) and requires that no one talk in the face of abomination--is complex. Believing in conspiracies requires delicate webs of trust. It requires (often) armies of faceless killers who, there is no evidence, have ever existed. Maybe it's because I've known plenty of real special forces guys that I know they wouldn't take on missions to kill civilians without thinking about it for themselves (and no matter what you may have heard, these guys are not chosen because they are ultimate order followers--they are all chosen for intelligence and performance characteristics ... and mental stability--something that anyone participating in a 9/11 cover-up would lack).

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