State Your Purpose

Often, while looking for answers, you end up learning about something you weren't even looking for. The "something I learned, while looking up something else" syndrome. This often goes a long ways towards our daily goal of "learning something new every day". Today I was led to Wikipedia in search of the "purpose of the Federal Reserve". As interesting as the Fed's "rare" inter meeting 3/4 Fed Funds rate cut was Wednesday morning, and the U.S. and World financial market's reactions to it, it left me curious as to why they really did it. I was not aware that the Federal Reserve was in the business of, or supposed to be in the business of "Saving The Stock Market". This is what we learned:


Purpose:


The primary motivation for creating the Federal Reserve was to address banking panics (bank runs). The Federal Reserve briefly describes the circumstances that led to its creation, the purpose for creating it, and functions of the system in The Federal Reserve in Plain English[22]:

"Just before the founding of the Federal Reserve, the nation was plagued with financial crises. At times, these crises led to “panics,” in which people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy."

The purpose of the Federal Reserve System is formally stated in the Federal Reserve Act[23]:

"To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."

The purpose and functions of the Federal Reserve include[22][24]:

• to address banking panics (bank runs)
• to serve as the central bank for the United States
• to strike a balance between private interests of banks and the centralized responsibility of government

- supervising and regulating banking institutions
- protect the credit rights of consumers

• to manage the nation's money supply through monetary policy

- maximum employment
- stable prices
- moderate long-term interest rates

• maintain the stability of the financial system and containing systemic risk in financial markets
• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
• national functions

- facilitate the exchange of payments among regions
- strengthen U.S. standing in the world economy

• regional functions within the nation

-to be responsive to local liquidity needs

http://en.wikipedia.org/wiki/Federal_reserve

Fascinating discovery. The page has a great historical representation of the Federal Reserve at the link above as well. Did you know that the present Federal Reserve is the THIRD central bank of the United States? Neither did I.

Now nowhere in that description above does it say that the Fed is supposed to save the stock markets. It perhaps could be construed by the supposed mandate, "maintain the stability of the financial system and containing systemic risk in financial markets" that the Fed should rescue the stock market, but one continues to wonder.

You may ask why I have all these questions. "Well, shouldn't you as well?" I might reply. But I began to wonder if the Fed would also cut interest rates at their big pow-wow this week. I'm convinced that if they fail to cut rates again on the 30th, then there inter meeting cut was purely in an effort to stave off a crash in the stock markets. And if they do cut rates some more on Wednesday, the situation in the credit markets is far-far worse than we've been led to believe or could imagine.

At the end of the day I found it disturbingly amusing that the only thing holding up the stock markets are Fed rate cuts and the hopes for more. Gary North covers this thought with great insight in his recent essay At the Edge of the Abyss:

We appear to be in the early phase of a financial earthquake that will get into the history textbooks. The volatility of the American stock market indicates something severe, yet at present is being contained. Contained by what? By rumors and hope. http://news.goldseek.com/LewRockwell/1201461355.php