How do you regard the Federal Reserve?

Post Reply New Topic

There's still a lot of goodwill out there but clearly they can't drive that toward a supernova. I'd think also that they have accountability both to the people of the US as well as foreign buyers.

Certainly for its regulatory functions the Fed is answerable to Congress, and Congress has the whip hand, because Congress is the body that created the Fed and can change its statutes.

I have to agree with AG, that's bad. Its essentially saying that any big financial firm who has senators or representatives on the campaign dole essentially has their hand on the buttons of the money press by proxy.

...As much as we hear politicians, pundits, tea-party patriots and the Congressional Budget Office obsessing about government debt, it was excessive private debt — not public debt — that caused the 2008 financial meltdown. And it was private debt — some of it since transferred to the public — that lies behind the current European debt crisis. (Greece is unique in having a public sector that ran up spending while its private sector is rather conservative.)

As the political rhetoric about the federal deficit has heated up, we’ve lost sight of the progress that’s been made in bringing total debt back under control. The U.S. is actually doing much better than you’d think if you just listened to the conventional fears about how we’re rushing headlong into a debt Armageddon.

In fact, since the recession ended in June 2009, total U.S. debt has risen at the slowest pace since they began keeping records in the early 1950s. While Washington has taken on a lot of debt since then, the private sector has paid off, written off or dumped on the government almost as much.

As a share of the economy, debt has plunged as a consequence of rapid deleveraging by families, banks, nonfinancial businesses, and state and local governments. The ratio of total debt to gross domestic product has fallen from 3.73 times GDP to 3.36 times.

In the 11 quarters since the recession officially ended, total domestic debt has risen by just $702 billion, or 1.4%. By contrast, in the 11 quarters before the recession began, in those bubble years of 2005, 2006 and 2007, total debt increased by $10.7 trillion, or 28%.

And it wasn’t just the U.S., other advanced economies were adding on to their debt loads as well, with most of the debt taken out by the private sector.

Debt was growing at an unsustainable pace, but it was fueling the U.S. and global economies.

Economists who have studied the impact of indebtedness have found that low levels of debt are essential to growth, but that high levels of total outstanding debt can hurt an economy. Beyond a tipping point, adding on more debt will reduce growth over the long run, even if it inflates a bubble in the short run.

“At low levels, debt is good. It is a source of economic growth and stability,” concluded Stephen Cecchetti, M.S. Mohanty and Fabrizio Zampolli, economists for the Bank of International Settlements, in a paper presented at the Federal Reserve’s Jackson Hole conference last August. “Beyond a certain point, debt becomes dangerous and excessive,” and can lead to increased volatility, financial fragility and slower growth. It can even bring down the real economy with it, as we have seen. Read the BIS paper, “The Real Effects of Debt.”

Cecchetti and his co-authors found that growth can be impaired once nonfinancial corporate debt hits about 90% of GDP, or when household debts hit 85% of GDP, or when public debts hit about 85%.

In the U.S., household debt has now fallen to 84% of GDP from a peak of 98%. Nonfinancial corporate debt has fallen to 77% from a peak of 83%. Financial sector debt has plunged from 123% of GDP to 89%. Public debt has risen to 89% from 56%.

The deleveraging process in the private sector still has a ways to run, not based on some economists’ rule of thumb, but based on what real people are actually doing. Banks and households are still slashing their debt, while nonfinancial companies are beginning to borrow again, but only a little, according to the latest data from the Federal Reserve’s flow of funds report. Take a look at the flow of funds.

According to a study by McKinsey published earlier this year, U.S. households may have two more years of deleveraging left before their debts are sustainable again.

If McKinsey is right, the U.S. economy may have to endure a couple more years of slow growth.

Well let's be clear, a great deal of economic activity takes place on the basis of creditworthy relationships.

If my promise to pay is good enough for the bank that holds my mortgage and issued my credit card, and if their assessment of my credit worthiness is good enough for the shareholders of that bank to continue their investment, then why is that any different for the federal reserve?

The investors of the world see the United States as a good bet. They believe that US government debt is a reliable investment vehicle, and they buy dollars as a result.

If the issuance of US currency was truly a matter of sleight of hand, as the doubters are so fond of trying to maintain, then why would anybody ever buy US dollars? Why wouldn't you just put your money in gold and commodities futures?

It's an old cliché that a thing is worth what people will pay for it. And people are clearly willing to pay for US dollars. So that suggests to me that the fed is not so unreliable as others would like to believe.

It's a mixed agency. The head of the federal reserve is actually put into power by the US government, and the organization itself has a government mandate. It is not a wholly private corporation, and analyzing it as such would be a mistake.

Incorrect.