December 17, 2013
Reiss on Myths of the Fed
Bankrate.com quoted me in a story, 5 Myths Debunked About The Federal Reserve. it reads in part,
Assassination, foreign control and money printing: the stuff of a motion picture thriller?
Not in this case. They’re all the fodder for wild and surprisingly popular myths surrounding the nation’s central bank, the Federal Reserve.
It does wield considerable power, evident in the extraordinary measures taken during and after the financial crisis. But it’s amazing the things that otherwise reasonable people say about this admittedly complex U.S. government institution.
David Reiss, professor at the Brooklyn Law School, says, “To most of us, the Federal Reserve is a riddle, wrapped in a mystery inside an enigma, to borrow Winston Churchill’s phrase.”
With the Fed celebrating its centennial, the time is right to tackle some of these myths head-on. There are many myths out there regarding the Fed. Here are just a handful.
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Myth 3: The Fed prints money
The notion is rooted in the Federal Reserve’s control of the nation’s money supply. The Bureau of Engraving and Printing, part of the U.S. Treasury, is responsible for printing currency.
“Although the Bureau of Printing and Engraving prints it, it delivers it to the Fed, and then the Fed gets to decide how much of it to put out into the economy,” says W. Michael Cox, director of the O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business. He’s also former chief economist of the Federal Reserve Bank of Dallas.
In a way, Reiss of the Brooklyn Law School says, “the Fed can create money and does so in a variety of ways.” What he means is the Fed can increase the money supply through its monetary tools. Since the end of 2008, it has used “quantitative easing,” or QE, a term used to describe the Fed’s strategy to boost the supply of money. In the latest round of QE, the Fed has undertaken the monthly purchase of $85 billion in assets over the past year.
If you want to describe the process correctly, you might take a cue from St. Lawrence University’s Horwitz. The central bank isn’t in the printing business, but it has some control of the process.
“The money that the Fed creates is all done electronically in the form of bookkeeping entries that expand the deposit accounts that banks hold at the Fed,” he says.
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