anachronism: A thing belonging or appropriate to a period other than that in which it exists, esp. a thing that is conspicuously old-fashioned.
This very definition gives the characteristic of the Federal Reserve in the 21st century. The Federal Reserve has taken its mythos of grandeur from a period of horse and buggies, a time where most of the value of currency was printed on dollars, or in stationary bricks of gold – not electronic digits, oustanding derivatives contracts, rehypothecated assets, and international exchanges .
A time when most economists believed they could measure the money supply, by either m1, m2, or m3. A time when the financial market was little developed, beyond the circle of the banks in the western hemisphere.
Notice the middle circle has never increased its sized, but as the others circle became large, it became smaller - relatively.
From this historical standpoint (and outdated perception) stems the power vested in the Federal Reserve to “control” or even “remedy” issues in the economy. LAUGHABLE
First of all, the Federal Reserves primary tool of implementing monetary policy is through its open market operations (since the fed funds rate is market based and no one dares to borrow from the discount window).
Contrary to the popular opinon, the Fed doesn’t actually print/mint money, please read:http://www.ny.frb.org/aboutthefed/fedpoint/fed01.html).
This operation consist simply of…. buying and selling U.S. Treasury bonds. – sometimes to the tune of billions of USD in one month. Seems rather large, expect when you consider the fact that the world trades $150-300 billion a day in Treasury bonds in New York, a lone. Let’s not forget the Eurodollar has a net size of: $1.6 Trillion (estimated done in 1985), these are US dollars abroad.
The Federal Reserves monetary arm really becomes a drop in the ocean, when the dollar is pinned against other currencies in the foreign exchange market – a market that moves $1 TRILLION per day. The sheer irrelevance should be apparent, if the attempts at QE didn’t do it for you; and this lack of prowess goes for all central banks.
According to Allen Meltzer, the foremost academic on the Federal Reserve and monetary policy, if the world’s central bankers were able to pull together, they could trade only about $14 BILLION a day. Lets face it, the Federal Reserve faced it golden years during the Great Depression when it could actually attempt to control a money supply, that consisted of physical “dead presidents”, and hoarded metals. You want to print money, buy a credit card. Having liquidity problems? Raise money in the capital markets (long term), or the money markets (short term), what’s the use of the Fed? No wonder they forced certain firms to take bailout money, when they clearly didn’t need it.
Its time to see the Federal Reserve for what it is in this century: A political unit. All central bankers have become politicians, hence the transparency of the Federal Reserve Chairman, and their dedication to non-monetary tasks, such as full employment. Bernanke may give just as many speeches to the public as Barack Obama. A clear admittal of irrelevance by the Fed.
I end with two quotations:
“Bank Secrecy is in the bones of central bankers. It goes back to a time when the knowledge banks gathered – about changed in interest rates and foreign exchange rates, the creditworthiness of borrowers, corporate investment plans – was available only to banks, which spent a good deal of money gathering it. Bank income derived not so much from maturity transformation-taking very short term money like checking account deposits and converting it to loans of some duration – as from information advantage.
“Do we”, asked E. Gerald Corrigan, former president of the Federal Reserve Bank of New York and chairman of the executive committee of Goldmans, Sachs, “really understand the long-term consequences of the technologically driven disintermediation of payment flows away from credit-sensitive financial institutions?” To which the short answers was: no, we don’t.
Enter the trader, stage right.