Tuesday, April 29, 2008

Where Do Fed Bailouts Come From?

There are a lot of conspiracy theories out there about who really owns the Federal Reserve and how they profit from the actions of the Fed. If you’re looking for a good explanation of the real ownership structure, I recommend reading the following article from an economics professor at The Citadel: http://www.libertyunbound.com/archive/2004_10/woolsey-fed.html.

In reality the Fed is owned by its member banks, though the benefits of ownership are commonly misunderstood. The main benefit provided by the Fed is not the direct profit potential. Rather, the benefit to the member banks is protection. The Fed not only offers liquidity in the event of a bank run, it also offers an entity with the power to increase the money supply. That’s a handy benefit for bailing out a bank that has dipped its depositors’ cash into too many risky and highly leveraged investments.

The majority of directors on the boards of the Federal Reserve banks are appointed by the banks themselves. Is it any wonder that the Fed is so motivated to step in and offer bailout packages to keep these banks afloat? It’s not difficult to see the actual origin of these bailouts.

Whether bailouts should or shouldn’t occur seems to be a moot point to me. We have given the Fed the power of currency production. Do we expect them to use it to benefit the average American? If so, we ought to reconsider how the Fed is structured. Although the Fed certainly has to play the political game in pandering to Americans, at the end of the day they don’t work for us.

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