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I've heard the Federal Reserve is not actually federal and has no reserves, it's a private banking cartel that looks out for the interests of Wall Street, not most Americans.

This installment's "guest vetter" is Larry Koltikoff with Boston University. He is perhaps the best-known American economist on the issue of intergenerational conflict over entitlement spending on programs like Social Security and Medicare. You can check out his full bio here.

Question/Comment: We hear so much about the Federal Reserve influencing financial markets and manipulating the economy. Yet, I've heard the Federal Reserve is not actually federal and has no reserves, it's a private banking cartel that looks out for the interests of Wall Street, not most Americans. Is that true?

Paul Solman: Well, since its employees work for the government, it's federal enough, wouldn't you say? No reserves? Of course not. The banks keep their reserves with the Fed, as the Feds insist. If they weren't forced to and didn't, they'd have been tempted to do the same thing investors in these new-fangled securities did: borrow money with nothing down. And look where that's gotten us.

"Looks out for the interests of Wall Street"? Tell that to the shareholders of Bear Stearns, whose stock was worth $160 a year ago, $90 a month ago, $30 on Friday and $2 on Sunday. As engineered by the Fed. (To show how low that number was, the stock is now trading above $10, in anticipation of a much higher price than the Fed had decreed.)

Larry Kotlikoff, professor of economics at Boston University: The Fed is heavily influenced by Wall Street. Its chairmen have often come from Wall Street and returned there. It's hard not to be influenced by your past and future associations and associates. Having said this, I agree with Paul, that many Wall Street firms are now getting hammered quite hard by the credit crisis.

-- Posted April 1, 2008 | Comments (1) | Permalink