Spring Break
In face of economic adversity, government intervention a must
Sanjai Tripathi
Issue date: 4/7/09 Section: Forum
Have you ever wondered what the Federal Reserve System actually does?
If you are like the vast majority of Americans, you have no idea what it does. Knowing is important though, because without knowing what the Fed does, you can't understand the strategy that underlies the government's various stimulus and bailout plans. Without understanding, you also may not realize that us just doing nothing and letting the markets fix themselves is a mistake.
You probably already know the Fed is powerful. Its chairman and the regional presidents sit in 13 elaborate temples with pillared facades like the Greek Parthenon.
We hear about them all in the news. Even in normal times, when the Fed chairman makes a pronouncement on interest rate raises or cuts, like a Roman emperor at the Coliseum giving a defeated gladiator the thumbs up or down, the markets rise or fall in response.
It really isn't so dramatic in principle, however, at least in normal times. The main missions of the Fed are simply to keep unemployment low, keep inflation under control and to prevent runs on banks that would in turn destabilize jobs and prices.
The way the Fed does that is mainly by managing "monetary policy."
What that means is that the Fed controls the supply of money. It does this in the very literal sense by issuing U.S. currency. Look closely at a paper bill, and you'll notice it says "FEDERAL RESERVE NOTE" at the top of the front face.
Most "money" now is electronic, so the primary means of affecting the money supply is simply for the Fed to push buttons. The Fed is like a bank for banks, so it can simply buy or sell government securities and pay for or deduct the electronic "cash" from the banks' Federal Reserve accounts.
The effect of that is a basic economic one, involving supply and demand. Just like an increase or decrease in the supply of goods, such as oil, will affect the price of the good on the open market, in our credit economy a change in the supply of money affects the price of money.
If you are like the vast majority of Americans, you have no idea what it does. Knowing is important though, because without knowing what the Fed does, you can't understand the strategy that underlies the government's various stimulus and bailout plans. Without understanding, you also may not realize that us just doing nothing and letting the markets fix themselves is a mistake.
You probably already know the Fed is powerful. Its chairman and the regional presidents sit in 13 elaborate temples with pillared facades like the Greek Parthenon.
We hear about them all in the news. Even in normal times, when the Fed chairman makes a pronouncement on interest rate raises or cuts, like a Roman emperor at the Coliseum giving a defeated gladiator the thumbs up or down, the markets rise or fall in response.
It really isn't so dramatic in principle, however, at least in normal times. The main missions of the Fed are simply to keep unemployment low, keep inflation under control and to prevent runs on banks that would in turn destabilize jobs and prices.
The way the Fed does that is mainly by managing "monetary policy."
What that means is that the Fed controls the supply of money. It does this in the very literal sense by issuing U.S. currency. Look closely at a paper bill, and you'll notice it says "FEDERAL RESERVE NOTE" at the top of the front face.
Most "money" now is electronic, so the primary means of affecting the money supply is simply for the Fed to push buttons. The Fed is like a bank for banks, so it can simply buy or sell government securities and pay for or deduct the electronic "cash" from the banks' Federal Reserve accounts.
The effect of that is a basic economic one, involving supply and demand. Just like an increase or decrease in the supply of goods, such as oil, will affect the price of the good on the open market, in our credit economy a change in the supply of money affects the price of money.
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