“The Federal Reserve has no reserves and they’re absolutely not part of the Federal government.” The infamous Rep. Madison Cawthorn might have been wrong about the reserves part (it depends on how you account for the Fed’s loan balances), but he was right about the Federal Reserve not being a part of the government.
Here’s how the Federal Reserve works, straight from the Atlanta Fed’s own website3: “
The stockholders in the 12 regional Federal Reserve Banks are the privately owned banks that fall under the Federal Reserve System. These include all national banks (chartered by the federal government) and those state-chartered banks that wish to join and meet certain requirements. About 38 percent of the nation’s more than 8,000 banks are members of the system and thus own the Reserve Banks.
The concept of “ownership” needs some explaining here, however. The member banks must by law invest 3 percent of their capital as stock in the Reserve Banks, and they cannot sell or trade their stock or even use that stock as collateral to borrow money. They do receive dividends of 6 percent per year from the Reserve Banks and get to elect each Reserve Bank’s board of directors.”
That means that the Federal Reserve banking system is 100% entirely privately held by the member institutions, which are all for-profit companies. The Federal Reserve is staffed by officials promoted from those banks. They have the mission of controlling interest rates, which determines the fate of… the world’s for-profit banking industry.
I love the kid’s definitions on Merriam Webster as even I can understand them:
Cartel (noun): a combination of business firms to control world markets and fix prices.
Hmm. Please stand-by: dots are connecting in the brain. If 38% of the nation’s 8,000 banks own the Reserve banks and the promoted officials from those regional banks make up the Federal Reserve Board and they serve the interest of those banks while never having been elected and they are technically a combination of business firms to control world markets and fix prices… How would you define them?
So how did this come to be? It’s all in the name – Federal. When the Federal Reserve system was created in 1913, it was intended to stabilize a banking system that was subject to repeated panics and liquidity crises. The most recent was the Panic of 1907, caused (in part) by the failure of one singular financial institution (the “Knickerbocker Trust Company”) that threatened the whole system.6 (“Too big to fail” is not a new phenomenon!) Congress wanted people to associate the new central bank with all the integrity and credibility of the word “Federal,” whether it strictly speaking deserves it or not. (Congress has a history of doing this, from the 2001 “USA PATRIOT Act” which only functioned to reduce Americans’ civil liberties to the “Inflation Reduction Act” of 2022 which, as far as we can tell, only drove inflation up. I suppose it’s too much to ask for them to call them the “Mass Surveillance Act” or the “Driving Up Costs Act”, huh?)
This is not a new debate – in fact it all goes back to the Federalists versus the anti-Federalists at the founding of our country. The debate was between Thomas Jefferson, Sam Adams & Patrick Henry vs. George Washington, James Madison & Alexander Hamilton in a big We’re-Not-Royal Rumble. (I’ve got to admit I’m biased. My first research paper was in the 4th grade, and it was on Jefferson. I admired him for his inventions, such as the dumbwaiter, his stances on limiting the power of the federal government, but most of all for his writing.)
Jefferson wrote in a letter to John Taylor in 1816, “that banking establishment are more dangerous than standing armies & the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”. To John Wayles Eppes in 1813, Jefferson commented that “Bank-paper must be suppressed, and the circulating medium must be restored to the nation to whom it belongs.”2 His stance was clear.
With the recent attacks by Trump on Fed officials there comes a rousing chorus of bristling CNBC commentators on their midday show yesterday that “the Fed must be independent!” I’m not trying to get political here, I promise. I’m trying to say that (in my personal opinion) it doesn’t matter who’s on the attack – whoever attacks the Fed should be encouraged. Why do I say that? Well, aside from the philosophical and constitutional arguments had by the Founders, it’s also evident that the system hasn’t actually worked. Of the ten worst financial recessions in US history, nine have been after the creation of the Federal Reserve. (While they may not all be the Reserve’s fault, it failed to prevent them.) In the meantime, the Federal Reserve has continued to pay dividends, whether the system is profitable or not.8
This isn’t the only major story this week: On Tuesday, the US Navy deployed the USS Lake Erie and the USS Newport News to the southern Caribbean to join other Naval vessels to fight drug cartels which were designated foreign terrorist organizations4. In the context of Jefferson’s remarks, it’s clear where our leaders’ priorities are. Meanwhile the S&P 500 just hit its 27th new high of the year and the Nasdaq the 105th new high of the year after Nvidia reported yesterday. While their numbers disappointed a bit, they confirmed that AI spending was resilient.5 There’s trouble brewing in the housing market as now the median annual income needed to qualify for a mortgage to buy the average priced American home is up 60% from 2021 to $126,670, while the median household income is only up 1.3% from 2021. That’s unsustainable, and its reason 26,275 why we need lower interest rates as a nation.
The moral of the story is just block out the noise. Stay invested (as long as it meets your risk tolerance, time horizon and goals). Don’t listen all day on television or scroll through reddit, X and Facebook for all the reasons to jump out of the market. Like we discussed in the Half-Time Report last week, over the last 15 years most of the gains of the market have been concentrated into only thirty good days each year. If you’re not comfortable with your accounts, please tell us – we’ll go over your plan in detail and make sure it’s working for you the way you need it to be.
And if you listen to us, we’ll change your financial world … (right after the Fed does, of course).
Sincerely,
Scott Wright & Pate Hasty
The WTA Investment Committee
Sources:
1 YouTube: History of the Federal Reserve: A Banking Cartel? – YouTube
4 https://www.newsnationnow.com/us-news/more-naval-ships-caribbean-cartels/
6 https://histecon.fas.harvard.edu/crisis-next/1907/timeline.html#1907
7 https://money.howstuffworks.com/worst-recessions-in-us-history.htm
8 https://mises.org/power-market/how-can-fed-pay-dividends-its-shareholders-when-it-has-no-profits
