Federal Reserve Presentation Notes

By popular demand I have posted my notes for my presentation about the Federal Reserve of the United States below.


First of all its important to understand the context of this presentation. This is not a presentation about how the Federal Reserve works. Although I touch on it brielfy, I assume the audience has a general knowledge of what the Federal Reserve is.


I am taking a course in my Finance degree called International and European Legal Aspects of Corporate Governance and the first part of this course was focused on white-collar crime. My professor, who is European, puts heavy emphasis on regulating corporations and sees institutions like the SEC, IMF, and World Bank as more or less "good" institutions. During one of my lectures my professor quoted a saying from one of the founding fathers of the idea of white collar crime. It reads as below:


"A corporation is to the white collar crime as a gun or knife is to the common criminal".


My professor used this to explain that white collar criminals do not exist with out the corporation and they use legal business practices to make illegal profits.  She used this also to say that we need to understand that white collar criminal operates within an environment of the corporation and in order to understand the criminal better we need to understand the environment. She also stated we need to increase regulation of corporations to control the environment of corporations.


Although I agree to some extent, I feel that it is not seeing the full picture. I believe in order to understand the culture and environment of the corporations that later on influence a white collar criminal, we need to take a bigger step back and look at the larger national or global financial environment that effects the corporations. The Federal Reserve has a big influence in creating the business environment in which all businesses and employees live and this is why I believe it is important to focus on the Federal Reserve which is the biggest corporation in the world.


NOTES:

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes....Money has no motherland; financiers are without patriotism and decency, their sole object is gain"

Napoleon Bonaparte, 1815


 Why should we care about talking about the Fed?


First of all its the largest bank in the world and it would be unfair to talk about white collar crime and regulating corporations without talking about it.


Why should Canadians care about the Federal Reserve? Canada and the United States have the world's largest trading relationship. What happens in the US will effect Canada whether we like it or not. The US economy is the the largest in the world and most countries hold the USD as their reserve currency. Because the USD is a reserve currency the world and the US is dependent on the fact that the USD remains somewhat stable.


Simply regulating corporations is not thinking big enough. I am not saying we need more regulation but lets address the bigger issue. If you agree that a corporation is in fact like a gun to a common criminal then you must also agree that regulating corportations will not get rid of white collar crime. Even if you took all the guns out of a society murder would still occur because there are other ways of hurting someone. The same applies to corporations. If we regulate them to the point where the institutions feels they have control over them white collar crime will still happen. We as people are too inovative to be limited by rules.


So to understand a white collar criminal we must understand the corporation. To understand the corporation we must understand its environment.


The Fed's Effect on the Global Environment


The Federal Reserve is not a part of the US government; It's a corporation. Apparently its a not for profit organization but as we will see later by law its shareholders must make 6% dividends.


Problems and Conflicts of Interest


Every USD in circulation represents debt that the US treasury owes the Federal Reserve. This is because when new money is introduced in the economy (ie 787 Billion Stimulus in 2008) the US treasury gives its treasury notes to the Fed and in exchange recieves Federal Reserve notes (the greenback). Because the Fed is in fact a corporation seperate of the US government it charges interest on this money in order to make the 6% dividends it must pay to its shareholders by law.


Two problems are created by this process.


1) the continual devaluation of the USD because adding more capital to the existing money pool will dilute the value of that capital. Some call this inflation by saying it costs more to buy bread than it did in the past because bread is worth more. This could be true but is the bread worth more or is the dollar which you are using to buy the bread less valuable therefore requiring more of the dollar to get that loaf of bread? Since the formation of the Fed there has been a continual devaluation of the USD, especially once it was taken off the Gold Standard in the 70's (the USD was pegged at $35 per ounce of gold. Compare that todays prices)


2) There is not enough capital in the existing money pool to pay back the principal and interest to the Federal Reserve. This is an intentional shortage of cash which makes an environment in which in order to survive one must take from others inside of their home markets, take from other markets throughout the world, or both. And we wonder why there is white collar crime.

If everyone is concerned with self preservation in an environment that has an intentional shortage of cash to begin with then there will be winners and losers.


In our class we looked at the Fraud Triangle or the 3 reasons people commit fraud. They are: Incentive/Pressue, Opportunity, and Rationalization. It is easy to see that the system of money creation in the US creates enormous pressure and rationale for corporations to do whatever possible to create a profit.


List of top 8 shareholders of the Federal Reserve


-Rothchild Bank of London and Berlin
-Lazard Brothers Bank of Paris
-Israel Moses Seif Banks of Italy
-Warburg Bank of Hamburg and Amsterdam
-Lehman Brothers Bank of New York
-Kuhn, Loeb Bank of New York
-Chase Manhattan Bank of New York
-Goldman Sacs Bank of New York

*the reason I bolded these three American companies is because we looked at them in class as examples of what happens when we dont regulate corporations but I think its very interesting that they are shareholders on the Fed. To me this is more evidence that we should shift our eyes off the everyday coporation and look to the Federal Reserve.

Please also note how many of the top 8 shareholders are not American. Here is what President Andrew Jackson said back in the day:

"It is not our own citizens only who are to receive the bounty of our government. More than eight millions of the stock of this bank are held by foreigners... is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country?... Controlling our currency, receiving our public moneys, and holding thousands of our citizens in dependence... would be more formidable and dangerous than a military power of the enemy. If government would confine itself to equal protection, and, as Heaven does its rains, shower its favour alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles."

The Federal Reserve  has assumed sweeping new powers in the last years. In an unprecedented move in March 2008, the New York Fed advanced the funds for JPMorgan Chase Bank to buy investment bank Bear Stearns for pennies on the dollar. The deal was particularly controversial because Jamie Dimon, CEO of JPMorgan, sits on the board of the New York Fed and participated in the secret weekend negotiations.

In September 2008, the Federal Reserve did something even more unprecedented, when it bought the world's largest insurance company. The Fed announced on September 16 that it was giving an $85 billion loan to American International Group (AIG) for a nearly 80% stake in the mega-insurer. The Associated Press called it a "government takeover," but this was no ordinary nationalization. Unlike the U.S. Treasury, which took over Fannie Mae and Freddie Mac the week before, the Fed is not a government-owned agency. Also unprecedented was the way the deal was funded. The Associated Press reported:

"The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs." This is extraordinary. Why is the Treasury issuing U.S. government bonds to fund the Fed, which is itself supposedly "the lender of last resort" created to fund the banks and the federal government?

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Some other Conflicts of Interest

First, the Fed is self auditing and the US government has very little, if any, say in how it operates. The US government can change how itself deals with the Fed (eg Exectuive Order 1110) but thats about it. I know that this was set up to keep the government in check but who is keeping the Fed in check? Corrupt power is corrupt power regardless of who has it. Just as people and corporations keep the government accountable the government needs to keep people and corporations accountable. This mutual relationship does not exist when it comes to the US government and Fed.

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President John F. Kennedy signed Executive Order No. 11110 that returned to the U.S. government the power to issue currency, without going through the Federal Reserve. Mr. Kennedy's order gave the Treasury the power "to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury." This meant that for every ounce of silver in the U.S. Treasury's vault, the government could introduce new money into circulation. In all, Kennedy brought nearly $4.3 billion in U.S. notes into circulation. The ramifications of this bill are enormous.
Soon after President Kennedy's assassination, President Johnson debased the coinage by removing all the silver from the silver coins and shipping it off to Switzerland.

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In November 2000, Iraq began selling its oil for euros, moving away from
the post-World War II standard of the US dollar as the currency of
international trade. Whilst seen by many at the time as a bizarre act of
political defiance, it has proved beneficial for Iraq, with the euro
gaining almost 25% against the dollar during 2001. It now costs around
USD$1.05 to buy one Euro.

Iraq's move towards the euro is indicative of a growing trend. Iran has
already converted the majority of its central bank reserve funds to the
euro, and has hinted at adopting the euro for all oil sales. On December
7th, 2002, the third member of the axis of evil, North Korea, officially
dropped the dollar and began using euros for trade. Venezuela, not a
member of the axis of evil yet, but a large oil producer nonetheless, is
also considering a switch to the euro. More importantly, at its April
14th, 2002 meeting in Spain, OPEC expressed an interest in leaving the
dollar in favour of the euro.


If OPEC were to switch to the euro as the standard for oil transactions,
it would have serious ramifications for the US economy. Oil-consuming
economies would have to flush the dollars out of their central bank
holdings and convert them to euros. Some economists estimate that with
the market flooded, the US dollar could drop up to 40% in value. As the
currency falls, there would be a monetary evacuation by foreign
investors abandoning the US stock markets and dollar-denominated assets.
Imported products would cost Americans a lot more, and the trade deficit
would be magnified.

If you have any questions let me know. Sorry it was so long and I know it doenst flow that well but I was sort of piecing my notes together and again didnt have much time to work on it.

Thanks for reading.