OVERVIEW OF CENTRAL BANKING DEFINED
The Federal Reserve System exists to provide stability to the monetary system. To me this is laughable, because when you artificially keep interest rates too low or too high, it creates boom and bust cycles in the economy. This is a far cry from creating stability.
FEDERAL RESERVE TOOLS
The Federal Reserve has three tools at their disposal to try and create “stability” in the markets.
- Interest Rates: The Fed can lower interest rates if they need to stimulate the economy, or raise interest rates to slow it down.
- Reserve Requirement: This is the amount that banks must keep on hand. For example, if the reserve requirement is 10% that means for every $100 that is deposited in the bank $90 can be invested, lent to another party or used. $10 must stay in the bank. The lower the reserve requirement, the more a bank can lend thus stimulating the economy. The higher the requirement means banks must keep more on hand meaning less is used with other consumers and thus the economy would slow down somewhat.
- Money supply. Print it and they will come! If there is money in circulation it will be used. If it is not, it cannot be spent.
There is much more in this interview, so listen to the whole thing. You will learn a lot about banking and realize how fragile the system is.