Wall Street’s Grand Design: The Federal Reserve

Approaching a potentially difficult topic in an engaging and readable fashion, Naclerio employs a mostly biographical lens to take readers through the origins of the Federal Reserve.

~ Robert David Johnson, Brooklyn College

On Wednesday, May 1, Richard A. Naclerio, author of The Federal Reserve and its Founders: Money Politics and Power presented on his new book at the Lunch & Learn Series at the Museum of Finance in New York City. Those who missed the event are in luck! Today we present you with an op-ed by Naclerio, written in response to the ten-year anniversary of the financial crisis of 2008.

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When Andrew Sorkin interviewed Ben Bernanke and Timothy Geithner last month for CNBC’s 10 Anniversary of the 2008 Crisis, Bernanke remembered he was “feeling so alone” and Geithner lamented the “fear and crushing burden of responsibility” he experienced. It’s not surprising these emotions arose in the former Fed chair and the former New York Fed president, as they were desperately carrying out the singular objective the Federal Reserve was designed to execute – serve Wall Street at any and all costs.

In November of 1910 Paul M. Warburg, partner in the banking firm of Kuhn, Loeb & Co. along with Republican Senator from Rhode Island, Nelson W. Aldrich and four other Wall Street men, spent nine days at the J.P. Morgan-owned Jekyll Island Hunt Club to secretly draft a central banking bill for the United States of America. They sought to create the Aldrich Bill, which they promoted as a banking reform bill but would, in fact, act as a transfer of economic and monetary power from the United States Government to the banks of Wall Street.

Warburg was the mastermind behind the plan and he stressed his theory that the name of the plan was as important as the plan itself for it to be accepted by Congress and the general public. He was clever enough to name the system the “Federal Reserve System” so as to falsely suggest to naysayers that it would be a government-run and government-controlled entity. Of course, it was not.

He was clever enough to name the system the “Federal Reserve System” so as to falsely suggest to naysayers that it would be a government-run and government-controlled entity. Of course, it was not.

The Aldrich Bill read like a letter to Santa Clause from Wall Street, and although the Senate killed it in 1911, it was used as the template for the Federal Reserve Act of 1913. In the end, with some minor adjustments, Wall Street received almost everything it asked for, which amounted to dominion over the fiscal policy of the entire nation with full legislative protection for their very private endeavor. Now, after over a century, the primary function of the Federal Reserve System remains as clear as it was when it was founded – that it was specifically designed by Wall Street for Wall Street.

In 2008, Bloomberg News took the Federal Reserve to court on non-disclosure charges and uncovered that the Fed’s quantitative easing initiative bailed out the banks to the tune of $7.7 trillion, ignoring the estimated one million people left homeless and millions more left jobless. Since then, the Fed has attempted to convince the public that they will work in a more regulatory capacity so as not to allow this type of crisis to occur again. One plan was to comply with and administer “stress tests” for banks to ensure their reserves were high enough and their risk was low enough. This spring, Goldman Sachs, Morgan Stanley, and State Street all failed their tests. However, all three banks were nonetheless given passing grades and were not required to release any plans for improvement. So, Jerome Powell has decided to keep testing but in 2019 will eliminate the pass/fail grading system altogether. That doesn’t seem like the work of a regulatory body.

Now, after over a century, the primary function of the Federal Reserve System remains as clear as it was when it was founded – that it was specifically designed by Wall Street for Wall Street.

In Geithner’s interview he addressed the Fed’s present policy on risk: “We force the system to run with much greater constraints on risk…we don’t want to erode that by time or deregulation.” However, Powell and the Fed are seeking a “redefinition” of the Volcker Rule of the Dodd-Frank Act. This provision is in place to ban speculative investments and proprietary trading practices, safeguarding depositors and their savings. The banks have been fighting this rule since its intended inception in July of 2010. Now, the Fed is involved and it is again acting as an agent of Wall Street—not as a regulator for the protection of American citizens—as it seeks the loosening, if not outright cancellation of the regulation.

These days the Fed not only protects the interests of Wall Street banks, but it also serves the well-being of banks in other countries. As we know, one of the Fed’s main functions is to buy and sell U.S. Government securities to help expand and contract the money supply. There is a collection of about twenty-five banks that do this and they are called “primary dealers.” The strange thing about these banks is that they are all private, and over half of them are foreign-owned institutions. It thus begs the question, “Since what is best for the U.S. is not always what is best for other countries, how do we know the Fed is always acting in our best interests?”

These days the Fed not only protects the interests of Wall Street banks, but it also serves the well-being of banks in other countries.

Finally, the Fed has raised interest rates eight times in the last three years, while making it public knowledge that they intend to continue hikes throughout 2018 and 2019. This policy will add to consumer spending in the battery of credit-based debt like mortgage payments, car payments, credit cards and credit accounts, and student loans. Economists’ myriad theories remain contentious while one fact remains constant: banks make more money when interest rates go up. In a nation where underemployment, wage stagnation, and an impending trade war loom over the average American, the Federal Reserve continues to favor an industry that has seen record profits over the past three years including the record-shattering year to date, where industry-wide profit wasover $60 billion. Yet, banks raised customers’ fees across the board including fees for checks, new accounts, and ATM transactions, while practically eliminating interest bearing savings accounts, which so many fixed-income customers relied upon for their growth or retirement.

Wall Street led us into this “Great Recession” through unadulterated greed and the Federal Reserve bailed them out. They charged us extra to earn record profits, they took away our interest on our deposits, and yet the Fed continues to do what it was designed to do over a century ago – protect Wall Street. And what of the average American? They are what they have always been in the banking community: ignored, overlooked, taken advantage of, and often ultimately blamed for the problems they face.

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