Can The Federal Reserve Help Us Today

J.P. Morgan saved the banking system back in 1907. Then the Federal Reserve was created to protect the system in 1913. While the FED was at the helm, we had the Great Depression and the inflationary period of 70s. If we look at the stock market charts, it looks like market volatility has actually increased after the FED during the past century! Trying to help the economy, Bernanke said he is going to keep the rates low until 2013. So, he is going to make further borrowing easy. We are already awash in debt, so the plan is to increase borrowing with the help of low rates. Sounds like a plan?

“The Panic of 1907” vs. the “Debt Crisis” of 2011

By Elliott Wave International

If “legendary Wall Street figure” ever described anyone, it was turn-of-the-last-century financier J.P. Morgan. You can throw in “bigger than life” to boot.

Morgan was used to getting his way. His steely eyes cast a “ferocious glare.” His bulbous nose added to his imposing presence.

Beyond appearance and persona, Morgan was a one-man central bank. Historians credit him with bringing calm, and loads of liquidity, to the “Panic of 1907.”

While he “stared down” that financial crisis, even J.P. Morgan would be no match for today’s national debt. In 1907, the Wall Street legend gathered New York City’s biggest bankers into his office and demanded that they had 10 minutes to collectively pledge $25 million to keep the NYSE open. Morgan got his way.

At the time that was a lot of money. But let’s see how far an equivalent sum (constant dollars) would go today.

I used several methods to calculate constant dollars from 1907, and the highest estimate (relative share of GDP) converts $25 million then to some $11 billion today.

Yet $11 billion doesn’t even make a dent in our $16 trillion national debt.

Interestingly, the 1907 Panic eventually led to the 1913 creation of the U.S. Federal Reserve. Then as now, the central bank’s function is “financial stability.”

Specifically, the Federal Reserve serves as a “lender of a last resort” — the role Morgan and his banker friends played in 1907.

Fast-forward ninety years: In 2002, Robert Prechter published Conquer the Crash (now in its second edition), and said this about the central bank:

“Congress authorized the Fed not only to create money for the government but also to ‘smooth out’ the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain.”

Sounds a lot like today, doesn’t it?

And just a few weeks ago, Fed Chairman Ben Bernanke said he wants to keep interest rates very low:

“Issuing a grim new assessment of the American economy, a divided Federal Reserve said it now expects to hold short-term interest rates near zero for at least two more years.”

Los Angeles Times, (8/10)

Since the start of the Great Recession, the Fed’s easy money policy has not restored health to the economy. Why should the same policy work in the next two years?

Notice how the above quote uses the phrase “a divided Federal Reserve.” With that in mind, here’s what Prechter published as recently as July 16:

“…when the trend in social mood turns down again, dissension will increase. The Fed is fracturing internally…”

Elliott Wave Theorist, July 2011

The U.S. Federal Reserve was created almost a century ago. Has it kept us financially stable? What does the future look like for America’s central bank?

 

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2 Comments

  • Matheus

    March 26, 2014 at 3:04 am Reply

    The Great Depression was not a sudden total colspale. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the northern summer of 1930.In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worst in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the American economy was the motor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, like the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the colspale in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933. Was this answer helpful?

  • Kurkak

    January 18, 2015 at 5:40 am Reply

    The simple rltieay is that the Kondratieff wave can’t be overridden and the tail end of the Kondratieff wave involves deflation and depression. In fact, the very transition through the later phases of the Kondratieff wave involves high consumer price inflation going to low consumer price inflation eventually going to zero consumer price inflation (which we have had a whiff of already, despite the Fed’s best efforts) followed by negative consumer price inflation, i.e., deflation.

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