Reason - The Federal Reserve is Not Your Friend

Op-Ed

By Rand Paul and Mark Spitznagel

Imagine that the Food and Drug Administration (FDA) was a corporation, with its shares owned by the nation's major pharmaceutical companies. How would you feel about the regulation of medications? Whose interests would this corporation be serving? Or suppose that major oil companies appointed a small committee to periodically announce the price of a barrel of crude in the United States. How would that impact you at the gasoline pump?

Such hypotheticals would strike the majority of Americans as completely absurd, but it's exactly how our banking system operates.

The Federal Reserve is literally owned by the nation's commercial banks, with a rotation of the regional Reserve Bank presidents constituting 5 of the 12 voting members of the Federal Open Market Committee (FOMC), the body that sets targets for certain interest rates. The other 7 members of the FOMC are the D.C.-based Board of Governors--which includes the Fed chairperson, currently Janet Yellen--and are nominated by the President. The Fed serves its owners and patrons--the big banks and the federal government, while the rest of Americans get left behind.

The Federal Reserve has the ability to create legal tender through mere bookkeeping operations. By the simple act of buying, for example, $10 million worth of bonds, the Federal Reserve literally creates $10 million worth of money and adds it into the system. The seller's account goes up by $10 million once the Fed's monies are received. Nobody's account gets debited for $10 million. This is a tremendous amount of power for an institution to possess, and yet the Fed shrouds itself in secrecy and is accountable to no one.

In December 2008, Congress summoned then-Fed Chairman Ben Bernanke to provide information concerning the enormous "emergency liquidity" programs that had begun during the financial crisis earlier that fall--all the new acronyms Wall Street analysts would come to know, such as TAF (Term Auction Facility), PDCF (Primary Dealer Credit Facility), and TSLF (Term Securities Lending Facility). Bernanke did not need Congress' permission to conduct those programs, but even worse, he refused to disclose the recipients of the $1.2 trillion in short-term loans that we now know were being administered behind closed doors. This staggering secret loan payouts doesn't even include hundreds of billions in "swaps" to foreign central banks. Bernanke's rationale was that if the Fed announced the names of the big banks being rescued, then depositors and investors would flee, thus defeating the whole purpose of the rescue operations.

Americans then and now were lectured that the trillions in loans and asset purchases were all for their own good and eventual benefit, to resuscitate the credit markets and bolster home values. Yet the truth remains--it is Wall Street that benefits from the Fed at the expense of Main Street. To make things worse, in October 2008--one month after Lehman Brothers collapsed and precipitated the worst of the financial crisis--the Fed began exercising a new policy of paying interest on reserves. The Fed began to subsidize and directly pay the nation's bankers not to make loans to their customers and keep their reserves parked on deposit with the Fed.

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