By Maui Curmudgeon

Are three letters in any other combination as scary as FED are to so many? To libertarians it conjures up despots and demons. To other, in fact to most, those three letter spell utter confusion.

In following the line of presidents in this election year, and writing about them, I find that the issue of a national bank has always been contentious in this country. I join those bewildered by it. So, I went to a book written just for me about the FED, by a FED governor – Preston Martin: The Complete Idiot’s Guide to the Federal Reserve.

First, some facts:

Between 1787 and 1836 there were three National Banks which Congress chartered, none for a significant length of time.

In 1836, the opponents of any National Bank won, and until 1866 there was no central banking system. Chaos ensued. During these 30 years, more than 30,000 kinds of currency was issued, by the likes of drug stores, tea companies and feed farms. After this disaster, and the Civil War, a national banking entity of some sort was established and supported, continuously.

The current FED was constituted in 1913, though the modern version was established in 1951. It has 11 district branches. Hawaii belongs to the San Francisco branch.

Some interesting FED actions in history include:

Bailing out the savings and loans in the 1980′s, a debacle which cost the taxpayers $400 billion. A brother of the current White House occupier – Neal Bush – ran such a sleazy bank and he had to be bailed out by his daddy to the tune of $3 billion. Neal is buried today pretty good, huh? Don’t hear much from him.

Before each quarter, the FED produces a big Beige Book (that’s its actual name) which it uses to review the current state of currency and economy, and make its decisions on interest rates. You can see all beige books at www.federalreserve.gov/FOMC/BeigeBook/.

The FED sets just two rates – that’s all. One is the rate the federal government charges banks for currency loans. The second is the rate banks charge each other.

It tries to set these rates with two goals in mind: having enough currency out in the world to keep the economy growing (not stagnant, or in a recession), but not TOO much currency that there is inflation. It’s a guessing game. As one former Chairman of the board said, “We have to take away the punchbowl just as the party gets going.” (Bill Martin)

It surprised me how little trust members of the board have for people who run banks. “Bankers don’t know anything about monetary policy,” said one board member. “They don’t have the foggiest notion of how it works.” Another member said, “only a fool asks a banker for advice on money.”

Heartening words, eh?

Anyway, if it’s all that simple. why is it so complicated? Nuance. Politicians, particularly presidents, have had a hard time trying to control the board, whether it raises or lowers rates, etc. And because these two rates effect nearly every other rate, the FED effects every aspect of economic life in the U.S.

That life, by the way, according to Martin, is in jeopardy. It’s old news that American’s don’t save anymore, and Martin believes that that one lack of habit alone will account for a lot of financial misery in the next ten years. As if we don’t have enough.

Also, see Secrets of the Temple: How the Federal Reserve Runs the Country by William Greider.