The Federal Reserve System is supposed to be an independent entity, designed to act as the central bank of the United States, but that’s not all it does. Some call it a political machine used as a “marketing scheme” to benefit the “deep state” interests of fat cat billionaires like George Soros.
“The gigantic money-printing scheme, Hoa Trinh, Instructor of Business Management at the University of Toronto writes, “appears to have benefited banks, corporations and those who can afford to play in real estate markets, in stock markets and in the broader financial world.”
Because the Federal Reserve operates “within government” but has a very little congressional oversight, they are pretty much free to do as they please, which makes them a powerful cog in the machinery of politics.
Their decisions can win or lose elections and their loyalty isn’t to the administration, it’s to their customers. While they make the “independent” decisions, the administration takes the credit or the blame.
All U.S. banks are required to keep 10 percent of their deposits set aside with the Federal Reserve. If you deposit $10,000 in a local bank, the Fed keeps $1,000 and the bank loans out $9,000, which they charge interest on. The money from the loans gets deposited in other banks which they can then loan out 90 percent of. It just keeps generating new money.
“The relationship between administration officials and the Federal Reserve system has always been a somewhat uneasy one,” Nixon’s chief economic advisor Paul McCracken warned. “But it is the President who will be held politically accountable for the economic results of Federal Reserve Policy.”
The “Fed” performs general functions geared toward promoting “the effective operation of the U.S. economy and, more generally, the public interest,” The Federal Reserve proclaims on their website.
The setup was designed to stabilize the financial system and limit “systemic risks,” by monitoring and interacting with monetary markets around the world. They conduct “the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.”
The “study and management” of “exchange relationships” is the very definition of “Marketing,” which centers around the needs of the customers. In the Fed’s case, their customers are private banks. Every day, the primary focus of their activities is to keep and satisfy their private savings and loan clientèle.
The U.S. Treasury department plays a role by selling IOU’s to the Fed. “foreign governments will buy and pay for them with American dollars. When the government spends these dollars, they get channeled into the commercial banking system as deposits.”
Corporations and commercial banks can sell their own bonds also. Today, they inject $4.8 trillion into the money supply which exponentially continues to multiply.
Because when the Fed pays for these financial assets, they simply make a bookkeeping entry, “banks can create up to $10 in new loans for every one dollar increase in the commercial banks’ reserves.”
The Fed’s independence “is couched in the belief that for a central bank to achieve its aims,” Business Insider explains, “it should be free from the pressure that might be exerted by politicians seeking to alter policy for their own ends, rather than putting the country’s prosperity first.”
Over the course of recent history, the bolder Presidents have tested the boundaries of just how strict that “hands off” policy needs to be, in various degrees of aggressiveness, and varying effectiveness in results, too.
President Donald Trump is currently taking heat simply for telling a reporter, he’s “not thrilled” the Fed is raising rates again, while Lyndon Johnson never heard the phrase “politically correct” in his life and he really knows how to push around a Federal Reserve chairman.
LBJ got what he wanted through blatant intimidation, Nixon got what he wanted through political maneuvering. Bush couldn’t get Alan Greenspan to cooperate so blames him for losing the 1992 election. Gerald Ford knows the Fed cost his re-election but he isn’t mad about it. Ford considered the policy move more important than a second term.
Ford followed the guidance of Greenspan, “who called for a tight-fisted federal budget without the big tax cuts that some White House staffers were seeking.” Unemployment went through the roof in October 1976, followed by Ford’s defeat to Carter in November.
“I happen to think that was the major reason we lost the election,” Ford said. “I have no regrets. My conscience has always been clear. It was one of those gambles. It didn’t turn out politically, but it was good for the country.”
The “presidential election cycle theory” has been largely discredited as an accepted economic principal but as a rule of thumb it still serves a practical purpose.
It says that during the first year of a new presidency, the stock market is at a low ebb. Then, it steadily improves toward the next election. Mostly, the reason for that is the sitting president wants a strong economy going into the election.
It is easy to see how things have changed since the 1950’s, calling the validity of the theory into question. President Trump’s first year in office saw a dramatic upswing in the economy. The part that still holds true is the connection that Fed policy can sway an election.
President Trump made a simple expression of his personal opinion and the media has been calling him all kinds of nasty names.
In a recent interview with CNBC, host Joe Kernen mentioned Fed officials already raised interest rates twice this year and two more are close on the horizon. President Trump replied, “I’m not thrilled.” Even though he “put a very good man in” at the Fed, meaning chairman Jerome Powell.
“I’m not thrilled,” President Trump expressed, “I am not happy about it but at the same time I’m letting them do what they feel is best.” That sounds like hands off, but not to liberal media. Various versions of “President Trump is trying to influence the Fed” are plastered across national headlines.
Lyndon B. Johnson knew how to influence the Fed and what Trump said isn’t even in the ballpark.
After signing huge tax cuts into law, which fired up the economy, Johnson “proceeded to bully the Federal Reserve to keep interest rates as low as possible,” Sebastian Mallaby writes in a biography of Alan Greenspan.
“In December, 1965, President Lyndon Johnson was pacing in the office at his ranch in Johnson City, Texas, while he waited for William McChesney Martin Jr., the chairman of the Federal Reserve Board, to visit for what Johnson called ‘a trip to the woodshed,’” economic historian Robert Bremner adds.
“Two days before, Martin had led the Fed’s board of governors to an increase in the Federal Reserve discount rate, the first in more than five years of uninterrupted economic growth… Johnson had advised Martin to delay the rate increase, and his instructions had been rejected.”
“When Martin walked into the office, Johnson immediately accused him of placing himself above the presidency and totally disregarding Johnson’s wishes: ‘You went ahead and did something that I disapproved of… and can affect my entire term here.”
Johnson “physically shoved him around his living room, yelling in his face, ‘Boys are dying in Vietnam, and Bill Martin doesn’t care.’” Ryan McMaken observes, the reference “was the 1960’s version of ‘you’re either with me or you’re with the terrorists.’”
Johnson began manipulating markets just to avoid raising the interest rate. When inflation inevitably started kicking in, aluminum makers raised prices. Johnson sold off some of our strategic reserves of aluminum until the price dropped again.
He used similar shady tactics for “copper, household appliances, paper cartons, newsprint, mens underwear, women’s hosiery, glass containers, cellulose, and air conditioners.” In 1966, when egg prices started going through the roof, Johnson ordered his surgeon general to “issue a warning on the hazards of cholesterol,” Mallaby reports.
Then there’s Richard Nixon. Documents show he “kept heavy pressure” on Chairman Arthur Burns to do his bidding.”
The National Archives preserves over 400,000 pages of Nixon’s White House records. Nestled among them are “many internal White House memoranda suggesting that White House aides devoted considerable effort to encourage Burns, appointed by Nixon in 1970, to stimulate the economy before Nixon’s 1972 reelection campaign.”
Nixon fired McChesney Martin just before the 1972 election, and replaced him with hand picked Arthur Burns.
For decades, there has been speculation that “Burns deliberately manipulated monetary policy to help reelect Nixon,” LA Times reports. “The documents show a pattern of close White House involvement with the Fed on monetary issues during Burns’ tenure, including frequent meetings among Burns and top White House officials.”
Nixon’s tapes captured many of their conversations. In one, Nixon is heard pressuring Burns to keep rates low, even if it meant inflation going up for a while. “We’ll take inflation if necessary, be we can’t take unemployment.”
In an Aug. 20, 1970, memo to Nixon, Paul McCracken patted Burns on the back for “effective leadership” after “easing monetary policy.” McCracken wanted the money supply to “be permitted to grow even more rapidly.” He’s not trying to influence the independent agency though.
“We urge this in no sense of trying to ‘take over’ monetary policy, but merely as those who will be held accountable for the economy’s performance during this period,” McCracken wrote to Nixon.
According to Nixon’s tapes, at one oval office meeting, Nixon had no intentions of losing his upcoming reelection. “I don’t want to go out of town fast,” he quipped. “This will be the last conservative administration in Washington.” The “liquidity problem is just bulls**t.”
Burns had been concerned about too much money in the marketplace. “I don’t want to see interest rates exploding,” he countered. “I could lose control of my board.” Nixon was worried. “Does this mean we’re stuck then with a recession next year?”
Burns was reassuring. “No, I predict recovery.” He lowered the rate a couple times and the economy indeed picked up as promised.
He told Nixon on the phone, part of his reasoning with lowering the rate a second time was to put the Federal Open Market Committee “on notice that through this action that I want more aggressive steps taken by that committee on next Tuesday.”
“Great, Great,” Nixon praised. “You can lead ‘em. You always have. Now, just kick ‘em in the rump a little.”
On Christmas Eve, 1971, Nixon was talking to George Schultz on the phone when Burns name came up. Nixon asked Schultz, “Do you feel, as far as Arthur [Burns] and the money supply, we got that about as far as we can turn it right now, have we? I mean as far as my influence on him, that’s what I’m really asking.”
Schultz wasn’t sure if Burns was getting the message, Burns was headed to the Virgin Islands when last seen days earlier and “wasn’t going back to his Board at all.” Nixon thought it might be time to grab his attention a little.
“Well, he’s just got to realize that it’s, uh, like it is with [Supreme Court Chief Justice Warren] Burger… I’m not going to let him name his people.” After kicking it around, they decided to keep a close eye on him and “bring him in” for a little LBJ style trip to the woodshed if “the money supply doesn’t grow as planned.”
Burns did keep the rates low, even though he says it wasn’t politically motivated. When he left office, his replacement Paul Volcker had to raise rates so high and so fast it was called the “Volcker Shock.”
Comparing that with President Trump being not thrilled makes it easy to see how the media keeps blowing anything that might seem slightly negative into nuclear proportions. Especially when it’s the Fed that has the President over a barrel in the long run.