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Abolishing the Federal Reserve System might seem like a drastic idea, but not when you get the full story...
You see, Congress created the U.S. Federal Reserve System to restore public confidence, provide the banking system a source of liquidity that would prevent its collapse and protect the public against inflation.
A century later, the banking system is so big its risks dwarf the Fed's liquidity capacity, and what cost a buck back then now will set you back $21.
That's why we asked Money Morning Chief Investment Strategist Keith Fitz-Gerald to explain how the Federal Reserve System actually helps a country's economy.
Most importantly, we wanted to know if the United States - or any country - even needs the Fed anymore.
What You Absolutely Need to Know About Money (Part 8)
It all starts with the Arab oil embargo of 1973-74.
The Arab members of OPEC proclaimed an oil embargo to punish the U.S. for aiding Israel. This action quadrupled the price of oil, roiling commodity markets, equities, bonds, and foreign exchange markets.
Energy prices soared. Speculation in oil exploration and production became feverish.
There was money everywhere.
Oil exporters in the Arab states were depositing their windfall "petrodollars" into big U.S. banks, who were in turn lending the money out as fast as they could.
What You Absolutely Need to Know About Money (Part 7)
By the start of the 1960s, banking in America was in a state of flux.
Boundaries were being blurred - especially those separating "commercial banks" and "investment banks" under Depression-era Glass-Steagall parameters. The banking landscape was shifting. In fact, it was about to go volcanic.
The Truman Administration had championed the break-up of bank cartel arrangements, whereby a powerful coterie of commercial-bank bond underwriters controlled how corporations financed debt and who got to distribute bond offerings. Subsequent regulatory changes (requiring bidding for underwriting assignments) broke up the "Gentleman Bankers Code," which had been code for cartel.
The New Crisis Warning Just Issued to the Federal Reserve
Before the housing market crash, economists warned that record low-interest and mortgage rates were fueling a housing bubble.
Unfortunately, those fears were both overlooked and underestimated.
Now, an advisory council to the U.S. Federal Reserve is warning the Fed that its record $85 billon-a-month stimulus and ultra-low interest rates are fueling new bubbles in student loans and farmland.
"Recent growth in student-loan debt, to nearly $1 trillion, now exceeds credit-card outstandings and has parallels to the housing crisis," according to minutes of the council's Feb. 8 meeting.
In addition, "agricultural land prices are veering further from what makes sense," the council said. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."
What You Absolutely Need to Know About Money (Part 6)
Our last chapter was about how the U.S. Federal Reserve was created and why. But it ended with an extreme example of how the universal central banking model works today.
As another domino threatened the house of cards holding up European banks, more money had to be pumped into Cypriot banks so their doors didn't close and rapid contagion wouldn't implode all of Europe, and then the world.
Only this time was different.
The European Central Bank (ECB) reached straight into Cypriot bank depositors' pockets and stole about $6 billion from them. The "how" isn't important. It's a simple equation, as revealed in Part V. Governments are the backstoppers of central banks; that's where their authority ultimately comes from.
Why did the ECB steal depositors' money? So they could turn around and lend that and more to the insolvent banks to keep them alive. It's the latest twist in the old "extend and pretend" game.
The big question is, how did banks get so big and so dangerous in the first place?
Or, how did stodgy traditional banking morph into "casino banking" on a global scale?
Here's how it started...
FOMC Meeting Message: Don't Blame Us for Sluggish Economy
The Federal Open Market Committee (FOMC) meeting concluded today (Wednesday) with one clear message to Washington: Thanks for the lousy economy.
Central bank members cited only "moderate" expansion in economic activity and a slow improvement in the stubbornly high unemployment level.
Acknowledging the economy is moving at an unhurried pace, the FOMC members pointed an accusing finger at Capitol Hill.
"Fiscal policy is restraining economic growth," the statement read. That remark was in direct reference to a deadlocked Congress, sequestration and its far-reaching impact.
A spate of fresh economic reports back that sentiment:
FOMC Meeting Minutes Signal These Investment Moves to Make Now
It's clear from the leaked Federal Open Market Committee (FOMC) meeting minutes that the Fed isn't taking away the punchbowl quite yet - but investors can take steps now to be prepared for an eventual sign that quantitative easing will end.
The FOMC meeting minutes show the central bank remains divided on when to end QE and raise interest rates.
The Fed's current policy of buying $45 billion in Treasuries and $40 billion in mortgage-backed securities monthly will remain in place at least through midyear. Near-zero interest rates also look safe until 2015.
The Fed has held short-term rates at historic lows since 2008, with a goal of juicing the anemic U.S. economy. The Fed minutes reiterated that Bernanke and company will keep rates super low until the unemployment rate dips below 6.5% or inflation rises above 2.5% a year.
The monthly March jobs report, released after the March 19-20 Fed meeting, showed a significant slowdown in job creation. While the unemployment rate ticked down to 7.6% from 7.7%, the rate decreased largely because a huge number of people stopped looking for work.
The glum employment data could even extend the Fed's 2015 date to raise interest rates.
What You Absolutely Need to Know About Money (Part 5)
Chapter Four ended as a cartel of powerful bankers gathered on Jekyll Island to develop a plan for creating a central banking system which would work for their interests.
John Pierpont Morgan was no stranger to how central banks worked. He had witnessed their power firsthand.
Junius S. Morgan, Pierpont's father, became a partner at George Peabody and Company in 1854 and moved to London - where the American-born Peabody had been bankrolled by Baron Nathan Mayer Rothschild. At the time, the rich and powerful Rothschilds exerted extraordinary control over the Bank of England.
George Peabody and Company rode the mania for railroad shares, whose prices in 1857 were benefiting from the Crimean War's impact on rising grain prices, which Western railroads transported in huge quantities.
But the good times didn't last.
FOMC Meeting: The Fed's Latest Plan
As expected, the U.S. Federal Reserve decided on Wednesday to keep interest rates at historic lows and to continue with its $85 billion in monthly bond-buying stimulus, despite a more optimistic labor outlook.
It was a near-unanimous 11-1 vote in favor of the decision, announced at the conclusion of the two-day FOMC meeting. Kansas City Fed President Esther George was the sole holdout.
The Fed said that while fresh information since the January FOMC meeting suggests "a return to moderate economic growth following a pause late last year, fiscal policy has become somewhat more restrictive."
In defense of its ongoing bond buying, the statement read, "To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month."
The aim remains the same: "to maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader conditions more accommodative."
FOMC Meeting: Can Bernanke Control the Market Reaction?
Financial markets have sometimes been turbulent after the release of the Federal Open Market Committee (FOMC) meeting statement.
For example, when the U.S. Federal Reserve announced on Aug. 9, 2011 to keep interest rates at a record low, the Dow plunged 205 points. Then before market close it turned around and closed 429.92 points, or 4%, higher.
According to former Fed governor Laurence Meyer, FOMC meeting statements on monetary policy are the second biggest market-moving events. FOMC meeting minutes releases are the first.
But the Fed is trying to change that.
In fact, the Fed will now issue its statement at 2 p.m., to give Chairman Ben Bernanke an opportunity to better control the message it sends to financial markets. Usually there are a couple hours that pass between the statement release and Bernanke's press conference.
"They probably did some research and said the market has periods of increased volatility right after the announcement," Robert Pavlik, chief market strategist at Banyan Partners, told the Associated Press. "Well, of course there's going to be. That's the way it works."
The Fed hopes the decreased time lapse will allow chief Bernanke to shed more light on Fed policy and prevent wild market swings based on speculation or concern.
"They are trying to be more open and work with the market to some degree. It's probably a good thing," said Pavlik. "You don't want to give away the store but to try to get their message across so that people can understand it in real time makes a lot of sense. Maybe, if they could put it in language that the average man can understand, instead of double-Fed-talk, it would probably make even more sense."