Questions about the Federal Reserve & central banking

[Southern Man]

Well, I'm really economically unknowledgeable about how central banking works so I'm hoping that some members could help me understand some basic things about it.

1. What are these "interest rates" that the Federal Reserve sets? Who decides at what rate to set them and why?

2. How does the Federal Reserve flood the market with credit, as many economists claim?

3. How did flooding the market with credit cause the housing bubble and financial crisis?

Please, do not post links to other sites.

I think the members in these forums can explain it better in layman terms than most economists I've listened to.

[teacherone]

search is your friend...

there are literally hundreds of posts on this forum which answer your questions...

[hugolp]

What you are asking is not that easy to explain. You need some economical culture to understand the beast, it has been a lot of hours of study for me and I am just starting to get how it works. But I will try to answer some of the questions:

1) The interest rate is the price people is willing to pay to enjoy money at the present time in respect with the future. For example, I will get my $200 pay check in a week, but I want to spend money now. Peter has $200 now. So I ask Peter to loan the money to me now so I can enjoy it now and not in a week. Peter has to wait a week to enjoy his money (until I give it back). For this, I pay Peter an amount of money, say a 1%. That is the interest rate.

In a free market, the interest rates are determined by offer and demand. If people is saving more and there is more money available for loaning the rates will go down, since there is more offer. If there is less money available for loaning the rates will go up, since there is less offer.

Now, the Fed changes the market rates artificially. It does this by changing the amount of money that is disposable for loaning. Usually the Fed wants to lower interest rates, so what it does is it "prints" more money and loans it to the banks or the goverment so there is more money available for lending and the rates go down. Its really that simple. The Fed just prints more money and makes it available, and that increases the offer of money, making the rates go down.

Now, as for who decides: The Fed board or council (I dont remember the name) decides the interest rates that they artificially want to set. The reasons? Usually political reasons or to save the banks. For example, low interest rates induce a aparent economic boom called a bubble, that then crashes in a crisis. But because by then that president is alredy gone he does not care. People still believe the economy under Clinton was great when he was just building up a bubble.

2) As I explained before the Fed just "prints" money and loan it to the banks or to the goverment. The exact process can get complicated and also changes through the Fed history.

3) This would be very long to explain. To understand this you need to reserach about the Austria Bussiness Cycle Theory and the capital structure theory.

If you have questions about what I said ask.

[Chester Copperpot]

Well, I'm really economically unknowledgeable about how central banking works so I'm hoping that some members could help me understand some basic things about it.

1. What are these "interest rates" that the Federal Reserve sets? Who decides at what rate to set them and why?

2. How does the Federal Reserve flood the market with credit, as many economists claim?

3. How did flooding the market with credit cause the housing bubble and financial crisis?

Please, do not post links to other sites.

I think the members in these forums can explain it better in layman terms than most economists I've listened to.

It buys assets and pays for these assets with newly created money.

[gonegolfin]

Read my post here ...
http://www.ronpaulforums.com/showpost.php?p=2555607&postcount=7

then read the entire thread ...
http://www.ronpaulforums.com/showthread.php?t=232181

You might then proceed to ... http://www.ronpaulforums.com/showthread.php?t=231798

Brian


Well, I'm really economically unknowledgeable about how central banking works so I'm hoping that some members could help me understand some basic things about it.

1. What are these "interest rates" that the Federal Reserve sets? Who decides at what rate to set them and why?

2. How does the Federal Reserve flood the market with credit, as many economists claim?

3. How did flooding the market with credit cause the housing bubble and financial crisis?

Please, do not post links to other sites.

I think the members in these forums can explain it better in layman terms than most economists I've listened to.

[Fox McCloud]

YouTube - Gold is Free Market Money (http://www.youtube.com/watch?v=L0m3aBogvZY&fmt=35)

this will explain and answer a few of your questions, for sure.

for even more detail information, I recommend this book: http://mises.org/Books/mysteryofbanking.pdf

I know you said to not link to other sites, but this isn't a "soundbite" answer that can be given in 2 seconds; the video is easy to understand, very educational, and very down to earth. The book provided (it's free by the by--PDF format) will answer any and all other questions you will most likely have.

[hugolp]

YouTube - Gold is Free Market Money (http://www.youtube.com/watch?v=L0m3aBogvZY&fmt=35)

This video is great. Watching this video I discovered and understood the capital structure theory.

[Live_Free_Or_Die]

nt