Tuesday, November 17, 2009


On December 23, 1913, the Federal Reserve System, which serves as the nation's Central Bank, was created by an act of Congress. The System consists of a seven member Board of Governors with headquarters in Washington, D.C., and twelve Reserve Banks located in major cities throughout the United States.

The primary responsibility of the Central Bank is to influence the flow of money and credit in the nation's economy. Second, the boards of directors of the Federal Reserve Banks initiate changes in the discount rate, the rate of interest on loans made by Reserve Banks to depository institutions at the "discount window."

So here’s your first test question:

(True or False) The Federal Reserve System or Central Bank is a government organization.

FALSE -- The “Fed” isn’t really any more a government body than is the Federal Express shipping company.

While the people who run it at its highest levels are appointed by the President and confirmed by the Senate, the seven members of the Board of Governors are theoretically treated to a “hands off” approach by any administration and the sitting Congress. So it flirts with being a wing of the government but whoever heard of a Congress man or woman ever telling the Fed what to do...and you know Congress loves to meddle with everything. So beyond the appointments things are definitely “private”.

The 12 Reserve Banks that are the true life blood outside of Washington have no political ties at all.

With that said, just why does the Fed’s URL on the Internet end with a .gov address? ( http://www.federalreserve.gov ) Seems like a marketing ploy to make Americans ”feel” like all the actions of “The Fed” are under control.

Now more serious details. --

By going to the Fed’s web site anyone can read weekly briefings on America’s monetary system. That’s a self-generated report card on how much your dollar is worth by explaining what backs it up.

Before I explain some recent and current valuations it’s important to look back to the “good old days”. No, I’m not jumping into the “Way-Back Machine” and talking about the precious time when our money was actually backed by gold. Let’s just go back to the period prior to 2005.

Originally the Fed had to rely on U.S. Treasury securities, Special Drawing Rights from the Treasury and Gold. A dollar was expected to be worth a dollar of something stable and valuable. They were required to work with the equivalent of AAA bonds.

That approach is what gave the world confidence is our little pieces of paper. You know, the ones that actually say “FEDERAL RESERVE NOTE”. Our money doesn’t say “UNITES STATES NOTE” or “AMERICAN NOTE” because our country’s three branches of government all together don’t really back any of it. Ouch!

Is that “private organization” label starting to get to you yet?

It is one of the largest reasons why -- in light of the mega spend-a-thon by the current Administration and the country’s massive debt -- people have been buying gold like never before. Today it’s about $1,140 an ounce, a figure unimaginable by most just a year ago.

Back to ‘05. In it’s infinite wisdom (or perhaps just a way for Barney Frank to accelerate his “a house for everyone” agenda), rules on the value of Reserve Assets were changed for The Fed. There was a small blip on the political screen, but some temperance on the part of Directors went a long way in catching the public’s attention. A little manipulation with the same type of assets would go a long way.

But then came 2007 and a Fed that was in the middle of the nation’s housing boom. Oh it can’t hurt to buy some of those mortgage notes, can it?

The move allowed the march of plentiful cash and low interest rates to continue. Since everyone on Wall Street was backing up the Brinks truck every day, no one was going to question The Fed purchasing some paper and listing them as “other assets” on its Balance Sheet.

If anyone actually read the Fed reports, they had adjusted the backing in the U.S. dollar from a very conservative 96 cents to about 91 cents. No big deal most believed.

But things were about to unravel. By March 4, 2009 the reserves behind the American dollar had dropped to about 40 cents on the dollar! Smoke and mirrors were the act of the day with lots of reassurances from both government and The Fed. But by then the country was six months into a massive financial collapse. With big financial firms walking the plank every day, there were no longer any atheists in the fox holes.

If you look at the Fed’s balance sheet today the group portrays the amount of backing to be around 81 cents. Not good, but a huge move back into the land of the living. Unfortunately little by little, people are beginning to see that assets just aren’t what they use to be.

The New York Federal Reserve Bank put on it’s cape and top hat and poof, it created a dummy LLC called Maiden Lane so the Fed could “sell” $775 Billion dollars in mortgages paper from Bear Stearns and AIG. Now instead of saying the paper was a Fed asset -- because EVERYBODY knows the paper is junk -- the Fed is claiming an Accounts Receivable from Maiden Lane as an asset, things are just soooo much better!

So that’s how they got the value behind the dollar back up above 80 cents.

The problem with this approach is simple. When (not if) inflation takes off (maybe even with ‘hyper inflation’), the Fed would normally turn to its “assets” and sell something to keep things in line. Too bad they have paper (from Maiden Lane, Bear Sterns and AIG) that no one will take off their hands.

One last ‘little’ concern comes from a dirty secret that should be easy enough for most people to understand.

The Federal Reserve Central Bank sells money to a select group of financial institutions around the country. They do this so those banks can offer loans to its customers and the availability of that money keeps rates low.

This “inner circle” buys money at a discount (below “par” or full value). Let’s say they step up to the bar and their buddies at the Fed say “How about if we sell you some dollars for 93 or 96 cents today?”

“OK” says the banks.

In the past this whole idea of getting a discount on the dollar was a good one because the money did get loaned out into the community. It might go immediately, the next few days or in the weeks and months to come. Of course this was a reasonable business transaction because -- in time -- the financial people charged interest on the loans.

But people are so impatient these days.

So impatient that now-a-days these same banks and institutions are allowed to head back to the “Cashier’s Window” at The Fed JUST SIX DAYS LATER and sell the money back. By the way. They sell it back at full par value ($1.00). So they hold a buck that the paid 96 cents for and without loaning a nickel to anyone, they get 100 cents back for it.

Four cents doesn’t seem like much until you multiply it out by 100 million or more because that’s the amount of money involved. No wonder the bonuses keep rolling on.

That’s a look at The Fed.

Look at the Central Bank’s web site for PDF documents that take you week by week through Wonderland.

My thanks to Roger Shealy who isn’t waiting for Congress to order an audit of The Fed. He has done extensive research on The Fed and has even succeeded in getting the organization to change some of its reports so they are more complete.

Check this link: http://skadvisors.com/index_files/20090316_collateral%20damaged.pdf

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