Federal Reserve Vice Chair Janet Yellen has confirmed the Federal Reserve isn't going to tighten the credit supply just yet. Image from Wikimedia Commons.

The Federal Reserve has announced that it won’t be tightening the national credit supply just yet. The Federal Reserve has certain controls over the amount of available lending capital in the financial system. Fears of inflation have caused some to think the credit supply needs to be tightened, but the Fed does not think that is currently prudent.

Fed says economy is too shaky to tighten credit

Prices of consumer goods, such as food and gasoline, have begun rising recently, causing many to worry about economic inflation. This has prompted lawmakers and finance industry insiders to question whether the Federal Reserve, the key institution in setting monetary policy and controlling things like inflation, should start restricting the available credit supply. Members of the Fed, however, are convinced that the overall economy is too shaky to tighten the credit supply, according to MSNBC. At a recent speaking engagement at Yale University, Fed Vice Chair Janet Yellen said that conditions weren’t right, but the central bank would be easing off its current policy of keeping interest rates at near zero.

Unemployment too high

The Fed partially controls the supply of available credit funding for the banking system of the United States and influences the interest rates that banks charge. During a recessionary period, the Fed can lend short term loans to banks at zero or close to zero percent interest to stimulate lending. Those banks can lend that capital to consumers, as mortgages or personal loans, or to other financial institutions. There are, of course, many other facets to the Federal Reserve’s operations, but credit supply is a key function. Alternately, the Fed can cut back on the amount of available capital if it thinks price inflation is making the nation’s currency worth less than it should be. The price of commodities like oil and food is increasing, which means that $1 doesn’t go as far.

Banks also have CFPB to worry about

The Federal Reserve is going to eventually restrict the supply of credit, meaning interest rates on loans will start increasing in the next year or so, once the central bank feels confident enough about unemployment and other economic conditions. Banks will also have to follow rules from the new Consumer Financial Protection Bureau, which will levy fines for legal violations. The bureau will start operating in July, and spokesperson Elizabeth Warren has promised the first new regulations set in place by the bureau by January of 2012, according to Reuters. The CFPB is still a hotly debated issue in Congress, so the extent of its reach has yet to be determined, but a greater degree of regulation is soon to set in for the financial system.

Sources

MSNBC

CNBC

Reuters

The battle to return to a gold and silver standard for U.S. currency has waned, but it hasn't died. (Photo Credit: Public Domain/U.S. Mint/Wikipedia)

Producing paper dollar bills is a more expensive proposition than ever, reports AOL News. That’s why Senators Richard Shelby, Robert Casey and Tom Harkin are continuing a battle that in one form or another has been fought since U.S. President Andrew Jackson held office in the 1830s. On behalf of the U.S. Government Accountability Office (GAO), the Senators are calling on Congress, the Federal Reserve and the Treasury to pull $1 notes from circulation and replace them outright with $1 coins.

Paper dollars to coins could save $5.5 billion over 30 years

Long-term projections regarding the impact of replacing paper $1 bills with $1 coins indicate that the U.S. government could save $5.5 billion over 30 years by switching. Considering the difference in average lifespan between modern bills and coins – 3.3 years versus 30 years – less currency would need to be produced. GAO studies also indicate that coins are cheaper to produce than paper bills.

Over 30 years, taxpayers would save $184 million annually

The GAO has lobbied for the changeover for 20 years, but success has been moderate at best. The Presidential $1 Coin Act of 2005 was intended to serve as a major transition in monetary policy, and Federal Reserve banks carry an inventory of 1.1 billion $1 coins as of Dec. 2010, writes the GAO in a related report.

Only 4.2 million $1 coins are in public circulation, including the discontinued Eisenhower, Susan B. Anthony and Sacagawea $1 coins and the current Presidential and Native American series. American Numismatic Society Executive Director Ute Wartenberg attributes this relative dearth to the populace’s conservative view toward the use of coinage. Coins are heavier than bills, and many wallets are not sufficient to tote them.

Cut off the greenbacks, cut the cotton

The U.S. must completely withdraw of $1 bills from circulation, so that the public doesn’t have the option, suggests Wartenberg. British and Canadian governments went a similar route in the 1980s when lowest-denomination notes were replaced, and many other nations followed suit or had made the change before. Yet Southern U.S. legislators have resisted plans of replacing paper dollar bills with dollar coins for fear of weakening the cotton industry, which supplies the U.S. Bureau of Engraving and Printing.

The battle of specie versus greenbacks

The fight to return to “hard money” has precedence in U.S. political history, from the time of President Thomas Jefferson to the Lincoln administration and beyond. Jefferson considered paper dollars to be “the instrument of the swindler and the cheat,” according to Robert Remini’s account in “Andrew Jackson and the Bank War.” The underlying reason for Jackson’s vehement distaste was that paper money, while legal tender in the government’s eyes, could be converted into precious metal – gold, in particular.

Once Lincoln attained the presidency (1861-1865), greenbacks became official thanks to the Legal Tender Act of 1862. A system of nationally chartered banks that report to a main central bank arose, and the U.S. was quickly flooded with paper money.

Sources

“Andrew Jackson and the Bank War”

AOL News

“Lincoln, Gold and Greenbacks”

“Reassessing the Presidency: The Rise of the Executive State and Decline of Freedom”

U.S. Government Accountability Office

Fixing volatility in the International Monetary Fund

Federal Reserve building, Washington, D.C.

Federal Reserve Chairman Ben S. Bernanke opposes a draft bill now in the Senate which would remove much of the central bank’s supervisory role and limit its authority to regulation of large bank holding companies. The bill, proposed by Senate Banking Committee Chairman Christopher Dodd, would limit the Fed’s supervisory authority to banks with more than $50 billion in assets. Smaller banks would be regulated by the FDIC and the Office of the Comptroller of the Currency. By contrast, under a House version of the bill, the Federal Reserve would keep most of its bank supervisory duties.  Neither bill would have any bearing on personal installment loans from private money lenders.

Bernanke: Fed promotes stability

Bernanke told the House Financial Services Committee that the central bank does not want the responsibility of regulating only those banks that are “too big to fail.” CNN Money quotes Bernanke as saying that the Fed’s oversight of all banks “significantly improves its ability to carry out its central banking functions, including making monetary policy, lending through the discount window, and fostering financial stability.” According to Business Week, Bernanke contends that the Fed is “uniquely suited to supervise large, complex financial organizations and to address both safety and soundness risks and risks to the stability of the financial system as a whole.”

Dodd: Continued risk of bailouts promotes instability

Dodd, who has been highly critical of the Fed’s banking supervision, hopes the proposed bill will prevent future crises requiring taxpayer-funded bailouts of large banking firms. Bernanke, however, believes that the central bank should retain oversight of banks of all sizes.

The Federal Reserve currently oversees about 5,000 bank holding companies and about 850 state member banks. Supervisory authority is delegated to 12 regional Fed banks by the Board of Governors in Washington. Under Dodd’s draft bill, the Fed would supervise only about 35 of the largest financial institutions. Legislators are scheduled to review and amend Dodd’s draft bill on March 22.