The Federal Reserve

Antisthenex

So, the President from the Federal Reserve Bank in Pennsylvania is visiting my school tomorrow, so I have the opportunity to meet him and have a Question/Answer session. This is an opportunity that I probably won't have again any time soon, so I'm hoping to make the most of it.

Do you guys have any suggestions for questions? What do you think of the Federal Reserve?

Xenocide Geek

ask him what the fed is going to do if all their short run interest cuts don't slow down the recession the economy is falling into.

that'd probably just get you a canned response, though.

Picardathon

Ask them why they aren't admitting that they aren't even trying to protect the dollar.

Jragghen

It's difficult to think of any good questions that won't immediatley get canned answers or would be obvious from his perspective, at least without being outwardly antagonistic.

How about something in the vein of the following:

As the head of the Fed, it is your responsibility to ensure that the Federal Reserve System balances the immediate needs of the economy against the longterm risks to valuation of our currency through inflation against foreign currencies. What factors do you weigh when making this decision, and which of these two responsibilities do you feel to be more important?

If someone who is more knowledgable about how the Fed works would like to modify that framework to a more pointed question, please feel free to do so.

Another tack could go along the lines of:

A fair portion of the economic difficulties we're facing at the moment are due to predatory lending practices which could have had their impact limited if the government exercised certain regulations over the loan officers and banks. What degree of oversight do you feel is prudent to prevent future complications of this nature?

Elki

Jragstupidname has a pretty good question. I'd go with something like it.


Some info on current Fed policy, in case you need it:

The Economist wrote:

No one could accuse America's policymakers of standing pat as the economy flirts with recession. Congress is close to passing a fiscal-stimulus package worth just over 1% of GDP (the House of Representatives passed its version at $146 billion on January 29th). And the Federal Reserve is loosening the monetary reins at the fastest pace in decades.

On January 30th America's central bank cut its policy rate by half a percentage point to 3%, little more than a week after slashing that rate by 0.75 percentage points in an unscheduled meeting. Official short-term rates have now fallen by 2.25 percentage points since the credit turmoil stemming from American mortgages began last August. With underlying inflation running at well over 2%, real rates are now barely positive. In a matter of days, American monetary policy has gone from broadly neutral to clearly loose. Gone is the incremental approach to altering interest rates. Instead there is a new Bernanke boldness.

The central bankers justify this shift on two grounds. First, evidence is mounting that the economy has weakened dramatically, making looser monetary conditions appropriate even though underlying inflation remains high. Second, Fed officials believe that the turmoil in financial markets, particularly the tightening of credit conditions, raises the probability of a nasty downturn. By acting quickly and boldly, the central bankers want to minimise the risk of such a calamity.

There is little doubt that the economy has slowed sharply. According to initial estimates published on January 30th, output grew at an annual rate of only 0.6% in the last three months of 2007 (see article). News from the housing market grows ever gloomier. The pace of home sales is still falling; the inventories of unsold homes are rising and prices are plunging. According to the S&P/Case-Shiller index based on 20 big American cities, average house prices fell by 8% in the year to November. Prices fell in every city in the last month. Retail-sales figures suggest consumers are growing more cautious, and December's surprise jump in the jobless rate raised alarm about the labour market.

But not all indicators point to disaster. Orders for durable goods and a private payroll report were surprisingly good. That suggests the Fed's boldness is driven more by policymakers' second rationale, that of reducing the risk of a negative spiral from financial markets to the economy. Hence the decision to slash rates on January 22nd, in response to a global sell-off. Strikingly, the Fed statement on January 30th mentioned “stress” in financial markets before discussing the economy. In a doveish text, the central bankers left no doubt that they were most worried about the downside risks and would act in a “timely manner” to address them.

Judging by the price of Fed fund futures, investors expect the federal funds rate to be as low as 2.25% by the end of the year. That highlights the danger in Mr Bernanke's new strategy. In trying to prevent financial-market calamity, the Fed may find itself pushed by Wall Street to leave interest rates too low for too long.

ege02

You know, I don't really have a problem with the Fed cutting interest rates so dramatically.

They still won't be able to prevent a recession, but they'll at least soften the impacts.

Jragghen

Elki wrote: »

Jragstupidname

There is a method to the weirdness behind my name. Not really going to say much more than that, but it's there.

ege02

You mean madness.

Method to the madness.

Jragghen

ege02 wrote: »

You mean madness.

Method to the madness.

I know that's the phrase, but the name isn't mad. Anyway, getting off topic.

Kakodaimonos

You could ask him what the Fed would be able to do if one of the big bond insurers (AMBAC or MBIA) lose their AAA rating.

Shakermaker83

You could ask him if he thought the Fed keeping interest rates artificially low for the last decade and now the subsequent bailout doesn't create an incentive for high yield high risk investments (subprime mortages) due to the fact that the corresponding risk has been mitigated by the Fed.

Hembot

Shakermaker83 wrote: »

You could ask him if he thought the Fed keeping interest rates artificially low for the last decade and now the subsequent bailout doesn't create an incentive for high yield high risk investments (subprime mortages) due to the fact that the corresponding risk has been mitigated by the Fed.

These are along the lines I've been thinking. Granted your common home buyer isn't likely to fall into this pit again soon, but given a generation or two, your average buyer will have forgotten and some banks will try to capitalize off it. While I don't think the big guys (Citi/BofA etc.) are going to given the slap they recieved due to massive write downs, smaller entities may attempt this in a "get rich quick" scheme and hurt a lot of people.

It's a great question IMO.

UEAKCrash

You could really go for the balls with something along the lines of "Why do you think the Federal Reserve actually managed to get created, despite our countries founding fathers being wholly against (what with it being on of the reasons we left for here and all...) any form of central government?

Shakermaker83

While I agree that we likely won't see another subprime housing crisis, as long as interest rates are below market value (or any commodity for that matter) people will take advantage of it and invest it somewhere in hopes of making a return. When capital is cheap and freely available it encourages malinvestment and speculation. The difference between the Fed and the free market is that the market will react quickly so that these types of arbitrage situations are rare and fleeting. The Fed is free to undervalue/inflate the currency for as long as it wants and as long as it continues to do so we'll keep seeing these bubbles- does this whole subprime fiasco sound strangely similar to the dot-com bust from the mid-late nineties?

Matrijs

UEAKCrash wrote: »

You could really go for the balls with something along the lines of "Why do you think the Federal Reserve actually managed to get created, despite our countries founding fathers being wholly against (what with it being on of the reasons we left for here and all...) any form of central government?

This is nonsense. One of the first actions that the first Congress of the United States took was to create a central bank.

Thanatos

Picardathon wrote: »

Ask them why they aren't admitting that they aren't even trying to protect the dollar.

Because when you admit that, people freak the fuck out.

Thanatos

UEAKCrash wrote: »

You could really go for the balls with something along the lines of "Why do you think the Federal Reserve actually managed to get created, despite our countries founding fathers being wholly against (what with it being on of the reasons we left for here and all...) any form of central government?

Yeah, they totally made sure that the central government had no significant powers.

And then they realized "oh shit, that doesn't work at all," threw the Articles of Confederation out the fucking window, and ratified the U.S. Constitution.

trentsteel

You could ask them why the Federal Reserve is neither federal nor a reserve.

Glorfindel

UEAKCrash wrote: »

You could really go for the balls with something along the lines of "Why do you think the Federal Reserve actually managed to get created, despite our countries founding fathers being wholly against (what with it being on of the reasons we left for here and all...) any form of central government?

Not another Ron Paul fan, I hope.

Shinto

Faggy Toes wrote: »

UEAKCrash wrote: »

You could really go for the balls with something along the lines of "Why do you think the Federal Reserve actually managed to get created, despite our countries founding fathers being wholly against (what with it being on of the reasons we left for here and all...) any form of central government?

Yeah, they totally made sure that the central government had no significant powers.

And then they realized "oh shit, that doesn't work at all," threw the Articles of Confederation out the fucking window, and ratified the U.S. Constitution.

Pick up a history book for Godsake.

Sentry

UEAKCrash wrote: »

You could really go for the balls with something along the lines of "Why do you think the Federal Reserve actually managed to get created, despite our countries founding fathers being wholly against (what with it being on of the reasons we left for here and all...) any form of central government?

I believe Alexander Hamilton would like a word with you... and by word, I mean pistols at dawn.

Frankly, your horrific understanding of U.S. History makes me wonder how you managed to work the internet, let alone manage to post here.

Aldo

Ask him how he sleeps at night and if he can look his wife in the eyes and tell her that he has always been honest.

Next question should be about the superbowl, to lighten the mood a bit.

---

I think there's a lot of good suggestions here, but you should really try to push beyond the canned answers, don't hesitate to come back to a previous question if you don't feel like he really answered what you asked. If he tries to confuse you with long-winded answers that don't go anywhere, ask something specific. Also, the little questions sometimes give the best responses, as long as you don't ask for his favourite colour or something.

ege02

Shinto wrote: »

Pick up a history book for Godsake.

Or better yet, Wikipedia.

Revision and Replacement of the Articles of Confederation wrote:

In May 1786, Charles Pinckney of South Carolina proposed that Congress revise the Articles of Confederation. Recommended changes included granting Congress power over foreign and domestic commerce, and providing means for Congress to collect money from state treasuries. Unanimous approval was necessary to make the alterations, however, and Congress failed to reach a consensus.

In September, five states assembled in the Annapolis Convention to discuss adjustments that would improve commerce. Under their chairman, Alexander Hamilton, they invited state representatives to convene in Philadelphia to discuss improvements to the federal government. Although the states' representatives to the Constitutional Convention in Philadelphia were only authorized to amend the Articles, the representatives held secret, closed-door sessions and wrote a new constitution. The new Constitution gave much more power to the central government, but characterization of the result is disputed. Historian Forrest McDonald, using the ideas of James Madison from Federalist 39, describes the change this way:

The constitutional reallocation of powers created a new form of government, unprecedented under the sun. Every previous national authority either had been centralized or else had been a confederation of sovereign states. The new American system was neither one nor the other; it was a mixture of both.

Historian Ralph Ketcham comments on the opinions of Patrick Henry, George Mason, and other antifederalists who were not so eager to give up the local autonomy won by the revolution:

Antifederalists feared what Patrick Henry termed the "consolidated government" proposed by the new Constitution. They saw in Federalist hopes for commercial growth and international prestige only the lust of ambitious men for a "splendid empire" that, in the time-honored way of empires, would oppress the people with taxes, conscription, and military campaigns. Uncertain that any government over so vast a domain as the United States could be controlled by the people, Antifederalists saw in the enlarged powers of the general government only the familiar threats to the rights and liberties of the people.

According to their own terms for modification (Article XIII), the Articles would still have been in effect until 1790, the year in which the last of the 13 states ratified the new Constitution. The Congress under the Articles continued to sit until November 1788, though seldom with a quorum near the end.

Historians have given many reasons for the perceived need to replace the articles in 1787. Jillson and Wilson (1994) point to the financial weakness as well as the norms, rules and institutional structures of the Congress, and the propensity to divide along sectional lines.

Rakove (1988) identifies several factors that explain the collapse of the Confederation. The lack of compulsory direct taxation power was objectionable to those wanting a strong centralized state or expecting to benefit from such power. It could not collect customs after the war because tariffs were vetoed by Rhode Island. Rakove concludes that their failure to implement national measures "stemmed not from a heady sense of independence but rather from the enormous difficulties that all the states encountered in collecting taxes, mustering men, and gathering supplies from a war-weary populace." The second group of factors Rakove identified derived from the substantive nature of the problems the Continental Congress confronted after 1783, especially the inability to create a strong foreign policy. Finally, the Confederation's lack of coercive power reduced the likelihood for profit to be made by political means, thus potential rulers were uninspired to seek power.

When the war ended in 1783, certain special interests had incentives to create a new "merchant state," much like the British state people had rebelled against. In particular, holders of war scrip and land speculators wanted a central government to pay off scrip at face value and to legalize western land holdings with disputed claims. Many of the participants in the closed Constitutional Convention were scrip and/or land speculators. Also, manufacturers wanted a high tariff as a barrier to foreign goods, but competition between states made this impossible without a central government.

GungHo

How about, "how does fiat currency work in a global market when the good-faith credit of any large economic power comes into question?"

KungFu

trentsteel wrote: »

You could ask them why the Federal Reserve is neither federal nor a reserve.

This would be mine.

Ninto

How about:

What's your preferred method of telling the markets ahead of time about upcoming decisions by the Fed? Your predecessor had a standing policy of always releasing conflicting and intentionally confusing statements in order to fuel a more diverse speculatory reaction. Is this policy still in effect?

Ninto

KungFu wrote: »

trentsteel wrote: »

You could ask them why the Federal Reserve is neither federal nor a reserve.

This would be mine.

He might ask you in return why you're neither an admiral nor delicious.

KungFu

Ninto wrote: »

KungFu wrote: »

trentsteel wrote: »

You could ask them why the Federal Reserve is neither federal nor a reserve.

This would be mine.

He might ask you in return why you're neither an admiral nor delicious.

See, I just wear this like a costume and jokingly say I am the Admiral of Deliciousness and everyone knows this is untru---ooohhhhhhhhhhh

Antisthenex

I got to ask him two questions, after some kid asked if he could print money for him.


My first question was:
"I've often read that the subprime mortgage collapse was possible and was as bad as it was due to the low interest rates set by the Federal Reserve. Since then, the interest rate has continued to drop a full percentage point. What is the logic behind this?"

His answer was basically: "We fucked up a couple years ago and set extremely low interest rates (around 1%). The result was the mortgage collapse you were talking about. It takes awhile for the interest rates set by the Federal Reserve to be felt in the economy. Yes, we are lowering it now, but we're hoping we find the right balance this time."

He also said the collapse wasn't as bad it sounded. He said only 20% of the people with those loans were kicked out of their house, most of those 20% weren't using that house as a primary living space but as an investment, and most of the people weren't "kicked out" but allowed to live there for a little longer.

I didn't find those statements very settling.



My second question was:
"Considering how the United States dollar is being devalued, even when compared to the Mexican peso, is a gold standard truly out of the question? Why don't we go back to one?"

His answer was basically: "The gold standard prevents economic cushioning, which is a good thing and a bad thing. It does prevent inflation, but it also does little to prevent economic panics. It is a viable alternative though, but the issue is that the government has always changed its policy when it's convenient. The other issue is the currency being dependent on something outside of our control. After the Gold Rush, gold was devalued greatly, and if something like that were to happen again, our currency would be devalued too."

I still didn't feel very settled with this answer. First off, I can't help but doubt the possibility of another gold rush, and the government's stubbornness doesn't mean it should be abandoned as an alternative.



I ended up having lunch with him, and we discussed the government's addiction to selling bonds; he made -at least to me- a surprisingly solid case supporting them.

Derrick

Sentry wrote: »

I believe Alexander Hamilton would like a word with you... and by word, I mean pistols at dawn.

Given his track record at pistol dueling, that's not particularly threatening.

Elki

I think we're done here. Gold standard stuff split into the old thread.