Lesson 2 - The Federal Reserve System Explained (pt. 2)

[Riddlerx333x]

@BasicEconomics what do you think about sound money? I think your presentation is great, but you are unaware on many issues.

[Riddlerx333x]

@BasicEconomics can you please tell me this? Is the fed a private entity? And if its private who is its shareholders?

[CanadaMMA]

The problem with telling people to go out and "Do their own research, don't just take my word for it." is that people don't. They just assume you are telling the truth. Why wouldn't they? You just challenged them to make sure you are telling them the truth so obviously you aren't afraid of what is out there.

If you really want people to go out and research for themselves, don't tell them to do so.

[cullisonjt]

I feel you got all the facts but your missing big picture. There wasn't always a Federal Reserve System but there were many throughout history. One of the main reason cited for stating our independence was to get away from centralized banking. Follow the money my friend and who wins in both good or bad economic times? The private centralized bank of America. A.K.A. the Fed. I think a little more detail to fractional reserve banking could be explained to people. Thanks for the video.

[mrpeepswoot07]

i dont believe that just fixing the feds problems will help. maybe for a small period of time, but in time it will go back to exactly that. the only way is to remove its power to manage and print america's money supply.

[CoombesKidd]

i say we ablish the federal reserve and move back to a system of free banking. If congress only has the power to coin money, then the only paper/digital money that is circulating is securities of the coinage. if a bank prints its own money too much it would be forced into liquidation. This was the best system of money we ever had; from 1840-1862 the dollar rose to the highest value in history and the business cycle nearly ended

[DogWeed91]

you said the fed's printing of money out of thin air can only end badly. but isnt that how the fed funds the buying of US treasuries? through their own printed money that is

[clevelandbrown123]

LOL @ ben bernanke's face palm

[BtownX]

if only more american have half of your understanding, our country would be in a much better place. Great presentation. Share this with all ur friends.

[Jessicakrtl]

Think of the treasury as the "Fed's Kinkos"

The treasury does in fact print the money ... but only at the Fed's discretion

[MRKetter81]

I heard your cat in the background. busted!

[albc1964]

@@@ BasicEconomics Thank You for allowing to p[ost my comments on this video. My reasoning especially for the last comment why should a hard working smart person like you or me pay for other people / businesses mistakes Just Food for thought Final.... Part Three

[albc1964]

... OR HOW ABOUT on a national level... alowing big comapanies to fail by not bailing them out BUT letting the market / customers decide if the comapny stays or go. I don,t recall the US or Local government bailing out Montgomery Wards department stores Part Two

[albc1964]

Hmm thought provoking video. So if abolishing the the Federal Reserve is a extreme example.. what would would work ? Perhaps the answer to large and complicated to explain. How about slowly requring the banks not to issue credit cards to people who have more than two credit / charge cards ?? PART ONE

[unillenium]

The politicians here in Canada aren't even allowed to talk in passing to Bank of Canada employees about monetary policy; but it is kept in check with periodic third party audits, plus it's intentions are published. It seems in the US that the government does infact have influence over the fed that it shouldn't due to government corruption. Tim Geithner as treasury secretary seems like the ultimate conflict of interests.

In Canada you can't jump ships between BoC and public office.

[MingePoonanny]

Our factional reserve banking system is broken. Banks arent loaning so their cash reserve ratios are increasing resulting in the money supply decreasing. Thats why the deficits havent resulted in inflation (yet). We are in uncharted waters. If the banks all start loaning money again, what would the fed do? I suggest increasing fed funds 100 basis points in one move. To keep the markets from melting down, follow up with a statement that interest rates will not be adjusted again for 26 weeks.

[amilcar60]

You should be an economic teacher.

[vipero00]

Why does the Debt/GDP window stay between 70-100%?

You would think as the private sector becomes more productive with technology and capital that the window would decrease. Doesn't productivity have an affect on the window?

[BasicEconomics]

As most economists would say "it depends"

what you laid out in your question is only half the equation. To reduce the Debt to GDP ratio you have to have a set of circumstances where the GDP grows at a higher rate than the national debt.

At our current levels of spending by 2012 we may be well over 200% Debt to GDP.

In order to get it back down to a healthy range we would have to have both a high rate of economic growth and a rapid reduction in government spending.

Taxes also play a role

[mediblue9]

@BasicEconomics We just need to produce a lot goods! 

[jimprjayp]

@BasicEconomics In the video you said the debt to GDP should be 30-70%. If I place the amount of 200% debt/income(GDP) that would mean i owe twice each month what I make. So if the avg person makes $4000 to $5000 a month each year they owe $8000 to $10000 a month. An individual would declare bankruptcy long before that, but we as individuals can't print money. If the fed's job is to guard against inflation, why do they keep loaning them money? It doesn't appear responsible.

[allon34]

I tend to agree with your conclusion about not throwing the Fed baby out with the Fed bath water. However, I'm not sure Alan Greenspan was as 'conservative' as you suggest he was. There are a litany of books out right now that blame Greenspan for the current crisis the U.S. is in. Real interest rates have been at historically low levels for the better part of a decade haven't they? I mean they're at Japanese 'liquidity trap' levels now, but they've been extremely low for a while.

[allon34]

oooppppsss posted in the wrong spot

Although, compared to Bernanke, Greenspan may look conservative in terms of controlling the money supply and fighting inflation.

[BasicEconomics]

Apology in advance for possibly getting too technical. Greenspan's coefficient for expected nflation was around 1.5, and his target inflation rate was around 2.5%, his coefficient for output was around .5

a very simplified version of his model was

ff=b(inflation, target inflation) + c(output, target output)

say rates were 7%, if inflation was expected to go up 1% in the next period, greenspan would apply his coefficient of 1.5 and raise the federal funds rate to 8.5%

[BasicEconomics]

(Cont.)

providing there was no change in output

let's say there is no expected change in inflation but output was expected to decline by 2%. Greenspan would lower the FF rate to 6.5%

so you can see greenspan's was much more of an inflation hawk, before 1980 the coefficient for inflation was around .8 we were chasing inflation but never catching up to it. So buy reacting 3 times more severely to expected inflation you get ahead of it and seal it off.

[BasicEconomics]

so what if you have projected both events in the same period? 1% rise in inflation and 2% decline in output. Well the FF rate would go from 7% to 8% you have opposing forces in your model.

Considering Greenspan's target was 2.5% inflation most of the time, he did an amazing job.

Now we don't know what coefficient factors Bernanke is using but it's very safe to say that he has downgraded the inflation coefficient and bumped up the output coefficient substantially. Many of us have our concerns.

[BasicEconomics]

also keep in mind my model is oversimplified version of the "Taylor Rule" there are smoothing factors and a lot of other junk that the Fed adds in there to complicate matters but I hope it gives you the higher level concept of how they are thinking.

FYI The Fed using Trimmed Mean PCE Inflation to do it's calculations, which is very similar to Core Inflation.

For more info look up "Taylor rule"

[caligvla71]

First part is great too!

[Joey6547]

This is very good. I'm an Economics major and currently in a Money and Banking course. This presentation is very well done and outlines monetary policy very clearly. This is what youtube needs to be like!

[legendre007]

Excellent presentation so far. :-)

When U say that the Fed has the power to print cash, don't U mean that the U.S. Treasury has that power, since the Treasury owns the mints that print the paper cash?

[BasicEconomics]

Yes it is the Treasury who actually does the printing of the cash through their Bureau of Engraving and Printing and sells it to the Federal Reserve Banks at manufacturing cost. The Fed is unrestricted on how much cash it can order. Basically a phone call from the fed and more cash will be printed.

[legendre007]

Thank you for the information. :-)

[Drakhpally]

@legendre007 No, the own the mint, but they print it under FED order.

"Though the printing of money is physically done by the Department of the Treasury, that agency is told by the Federal Reserve how much to print." Wikipedia, Federal reserve note.

[2598129]

@Drakhpally Yah why don't we just let the China print our dollars this way we know where the knock offs are.