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February 2012 Monthly Newsletter


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In February, the Dow, S&P 500 and the Nasdaq all flirted with four-year highs.  There were positive reports from the Labor Department, regarding increasing personal income and spending, as well as improving unemployment claims.  However, this letter will discuss a different topic.  Recently several people have asked me, “what is the Federal Reserve and what does it do”?  (Wikipedia is the source for the information)

Congress created The Federal Reserve System (Fed) in 1913, as the central banking system of the United States.  The Fed was granted authority to issue Federal Reserve Notes (U.S. Dollars).  Born out of the 1907 depression, Congress established three key objectives: maximum employment, stable prices and moderate long-term interest rates.

The system also provides the government with a ready source of loans and it is the safe depository for the federal government monies (i.e., our tax dollars).

The System is complex with both private and public components (fortunately, they can make decisions without permission of the Congress or the President).  The three components are: 1) the Federal Open Market Committee (FOMC – they buy and sell U.S. Treasuries and establish monetary policy), 2) The Board of Governors (they are Presidential appointments and sit on the FOMC) and 3) the 12 Regional Banks who implement policies and regulate commercial banks in their regions.

The 12 Regional Banks are private, not-for-profit banks.  Interestingly, the profits they do make are all owned by the government and not by the bank stockholders.  The stockholders of the banks get paid a dividend, which is not to exceed 6% in any year.

While the central bank has its share of critics, consider this.  In the 100 years of Fed control, there have been 22 recessional years with one depression.  In the 100 years prior, there were 44 recessions and six depressions.   The bottom-line, the Fed was created to give confidence in the banking system, which in turn should be good for the economy.

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