The Fed Isn’t Independent — Here’s Who Really Pulls the Strings

You've probably seen news recently of Trump attacking Federal Reserve Chairman Powell because of interest rates being too high, talk of Trump maybe trying to fire Powell, and the debate now roaring about who should really control monetary policy. Should it be an independent Federal Reserve or should it be under the control of the government, whether that is Congress or the executive branch? I'm going to show you why, number one, it is a myth that the Federal Reserve is independent. Number two, why it would be a terrible idea to move the Federal Reserve under full control of the U.S. government. And number three, why the correct solution is to end the Fed entirely and what to replace it with instead. I'm Joe Brown, I'm a former stockbroker and now I run Heresy Financial where I teach active investors how to decrease portfolio risk and increase long-term returns. And paying attention to news like this can give you an edge because it allows you to anticipate where the economy and markets may be headed soon. Now, Trump has been increasing his pressure he's been placing on Jerome Powell recently, urging him to cut rates soon. And this has not been subtle. In a recent tweet, President Trump called Powell Mr. Too Late. He also called him a major loser, urging him to preemptively cut interest rates. But it didn't stop there. Allegedly, President Trump is asking around and studying to find out whether or not he can actually fire Jerome Powell. Now, as you might expect, Powell's response to this has been largely silence. So our independence is a matter of law. Congress says in our statute, we're not removable except for cause. We serve very long terms. Fed independence is very widely understood and supported in Washington, in Congress where it really matters. And, you know, the point is we can make our decisions and we will only make our decisions based on our best thinking, best based on our best analysis of the data about what is the way to serve our to achieve our dual mandate goals as we can to best serve the American people. That's the only thing we're ever going to do. We're never going to be influenced by any political pressure. People can say whatever they want. That's fine. That's not a problem. But we will do what we do strictly without consideration of political or any other extraneous factors. Now, despite the fact that Powell here is adamantly defending the Federal Reserve's independence, the Federal Reserve is not actually independent. And you can see this by what he talks about as the only thing the Federal Reserve actually cares about, which is the dual mandate. Now, what is the dual mandate, you ask? It is pursuing maximum employment and price stability. Now, why do you think they care about those two things, maximum employment and price stability? The answer is because that's what Congress told them they were allowed to do and what they must do in the Federal Reserve Reform Act of 1977. In other words, the Federal Reserve serves Congress. Everything they do, they must be able to justify why it falls under serving one of those two commands given to them by the lawmakers in this country. Now, it's true there is a secret third mandate that the Federal Reserve has given to them by Congress. I've got a video coming out on that soon, so stay tuned. So we know that at least in terms of their function, their role, the things that they do, their purpose, they're not independent. They serve the government in that way. But they're also not independent in terms of their leadership. The seven members of the Board of Governors of the Federal Reserve are nominated by the President of the United States, and then they are confirmed by the Senate. Okay, so now we know that their job is given to them by Congress. We know that their leadership is chosen by Congress and the President. But what about the profits? During normal time periods, the Federal Reserve actually turns a profit. In other words, their expenses are less than their total income, and all of those profits, by law, are sent back to the U.S. Treasury. In recent years, the Federal Reserve has been running a loss, and so they have not had any profits to send to the Treasury. But in the past and in the future, when that corrects, any profits the Federal Reserve generates get sent to the U.S. Government Treasury. So what exactly is meant, then, by the Federal Reserve's independence? If their job is given to them by the government, if their leadership is chosen by the government, if their profits they generate are sent back to the government, then they are not independent of the government. In fact, what this really means is just that they are not partisan. In other words, they operate as an independent agency that is not elected based on party affiliation. They are not interested or concerned with swaying elections, because again, their job is given to them by Congress, and swaying elections is not one of those. But by pretty much every measure, the Federal Reserve is not independent. It is there because of and for the U.S. government. So the question being thrown around right now is, is that actually the optimal setup? Should we have this agency that sits outside of partisan control, that operates on their own interpretations of those jobs given to them by Congress? Or could we have better outcomes if we were to fold the Federal Reserve underneath the Treasury, or bring it more directly under control of Congress? Now, this would be absolutely horrendous for two main reasons. Number one, because it would represent an increase in the concentration of power. Whenever there is great power that has the potential to be abused, you want that power to be decentralized and distributed as much as possible. This is why dictators and totalitarian rulers are usually bad, because they have almost full control over almost everything. This is the idea behind the separation of powers, when the United States government was created, so that the interpretation of the law, and the writing of the law, and the carrying out of law, were separated to different individuals and different branches, to be a check and balance on that power. The more concentrated the powers are under one entity or person, the more chance or higher probability you have of abuse of that power. And the power of the purse is a strong one. The ability to create money out of nothing. The ability to set interest rates, which are the cost of money for everybody in an economy. These are massive powers that are ripe for abuse, because they can be so politically motivated. Which brings me to number two, that if the Fed were to be brought in, house underneath the Treasury or Congress, or brought under more direct control of the government, it would become partisan. And whoever was in control at that time, would be using it for their own benefit. In other words, fire up that money printer, start sending out stimmy checks, get interest rates low, because the boom temporarily always feels good, and by the time the bust happens, you'll probably be out of office anyway. So yes, the Federal Reserve as it exists, is far from ideal. But it would be a step in the wrong direction, to centralize that control underneath the government itself. Which brings me to the real solution. No Federal Reserve at all. And the question about what to replace it with, is nothing. Central banks in history are very new. We didn't have one in the United States until 1913, and pretty much nobody on earth had one, until a couple hundred years ago. And the historical data show, that they do not actually stabilize economies. Instead, they just take all the risk that exists, and they scale it up to the entire system. Yes, before we had the Federal Reserve, there were local banking panics. But those were caused by fractional reserve banking. In other words, fraud. I tell you, give me your money, and I say you can come back and get it at any time, and when you come back and try and get it from me, I don't actually have it. That's fraud. Instead of outlawing that, they nationalized it, created a central bank, and all that risk in the system still existed. It just scaled it up, and we had the first Great Depression in 1920, just seven years after the Federal Reserve was established. And we had the bigger Great Depression, that we now call the Great Depression, just nine years after that, starting in 1929. Two devastating nationwide economic collapses, as a result of all that risk being scaled up to the entire system, instead of being distributed like it was before. But the real reason to get rid of the Federal Reserve, is not just because of how it was before the Federal Reserve. The real reason is logic and morality. Pretty much every major economist, and anybody with a brain, understands that price controls are bad. Because of the problem of economic calculation, you cannot have some third party, centralized agency or department, just decide what the price of something should be, because that will cause shortages, misallocations of resources, bankruptcies, and all sorts of other problems. Prices are something that must be dynamically determined by all market participants, for the price to be accurate, and for it to send an accurate signal, about the scarcity of that good, relative to everything else. And if you impose a price on something, from the top down, you eliminate that signal being worth anything. Which means you can no longer make, an accurate economic decision about that good. But for some reason, anytime it comes to money, people just lose their minds, and think, well with money price controls are okay. The reality is, interest rates are the price of money. So why do we have a group of bureaucrats, who are sitting there, choosing what the price of money should be? On the other hand, they're also deciding what the supply is. That is quite literally what monetary policy is. It is choosing the supply, and the price of money. So they're controlling both sides. Imagine we had some round table of experts, whose job it was to determine, the price and the quantity of televisions, or of beef, or electricity. We can see very quickly, how bad that would turn, and how quickly that would turn bad. But somehow, when it comes to money, that's okay. Money is the one thing, that influences every single transaction, because it sits on the other side of every trade. Which means that, if you have control of the money, you have implicit control over the flow, of all resources in an economy. Price and supply, are effectively determined by the free market, for every good that the free market, is allowed to determine those things. We know it works. And considering how large the potential for abuses, in determining the price and quantity of money, the greater the reason, that that should be spread out, among as many individuals as possible. In other words, the entire free market. But we've seen this movie before, and we know how it ends. Because Trump was doing the exact same thing in 2018, as the stock market was falling off a cliff. And eventually, the Federal Reserve reversed course, began easing again. Sending asset prices on a multi-year bull market. Now that hasn't happened yet, but the time is probably soon. Which means the bear market, that we are currently in right now, it's days are numbered. Which means your time is running out, to take advantage of this bear market. Now, if you don't know how to pick out the best stocks, the highest quality assets. And you also don't know how to calculate, to see if those stocks are actually on sale yet. Because the fact that stocks are down, does not actually mean they are a good value. You have to actually be able to do the math on that. So if you don't know how to do that, I've created a bear market investing guide, just for you. And just for bear markets like this. I have it on a crazy sale, but just until the bear market ends. Because by then, it'll be too late. So don't wait, click on the link in the description below. As always, thanks so much for watching. Have a great day.