The fed, a private bank, arbitrates the fierce competition for political control of the money supply between the financial forces of the market and the spending of the government. The capitalist designed the central bank because they wanted to lend money. The expansion and contraction of the money supply is managed by the Fed giving the central bank power of the money supply, increase or decrease of employment, and shifts in the swing of the business cycle. The logic of the capitalist is the maximize profits and this means always the preserving the value of accumulated wealth. The primary purpose of the democratic liberal state is too ensuring liberty, equality, defense, and the economic welfare of its citizens. The capitalist distrust the government because they believe governments will seek a monopoly over the money. However, both parties share the same goal, economic prosperity.
So, the two branches of power, Government and the Market receive money flowing through the control of the Fed: The first through the Federal Reserve Bank of New York which links directly too the inner circle of bankers that control the money injecting into wall street and the second through the Treasury Secretary, the main ambassador to the government. The treasure produces high-powered money is invested into US securities having the net affect of expanding the money supply. The Fed is not immune from the market force, the Fed must steer the economy through the peaks and valleys of the business cycle and positions itself in a place of authority to maintain confidence in the currency. The fed operates within a sphere of intelligence; autonomously functioning to safeguard the orderly functioning of the financial system, which provides the financial funding, too drive a market economy.
The Fed is an independent judge, responsible for governing the world's money supply, independent from both the market and government. The fed only tangible asset with the market is credibility. The Fed establishes credibility with the public through formidable public relations, economic research, quiet legislative lobbying, and the exploiting the public demoralization with partisan politics. At the same time the Fed must persuade governments to accept market logic for the economy over the long run. The Fed presides over an inner club of national financiers protecting and publicly admonishing them to temper quests for profit, at the expense of the public good. The Fed influences market financial stability setting the bond market long-term interest rates. Interest rates affect either tighten or loosen credit by cooling down or heating up economic growth.
Globalization has transferred money sovereignty too the central banks. Democratic governments were not transferring more money sovereignty to the central banks voluntarily, it was stateless capital forces enabling global investors power too move money through foreign exchange currencies into the safest and most profitable place to put their money. Robert Heibroner said, "the social formation of capitalism has succeeded in bringing into being a realm of capital seemingly beyond all political control". The global capital suggested mobility and erupted into a torrent of Foreign exchange financial transactions increasing from $18 trillion per year too $250 trillion dollars per year. International bank lending surged with loans increasing 44% of GDP of 24 countries of the OEAD between 1980-1991. Central bankers were positioned between government ministers and global finance marketers fearing exposure and politically overburdening monetary policy.
U.S Security transactions in the 1980s swelled from 50% to 600% of GDP, Japan from 50 to 750% GDP, United Kingdom from 50% to 200%, and Germany from 10% to 50%. In the 1980s, US deficits hit $100 billion and represented 3.5% of GNP. Formerly developed nations couldn't attract foreign capital beyond 1-2 percent of GNP; at that point market forced induced voluntary economic adjustments. 1987, foreign investment soared from Japan with Japan's stock market topping 26,000; second, globalization created leverage corporate takeovers causing US stock prices to soar (a Tax introduced by the House Ways and Means committee would burst the bubble); third, the gap between the bond market and the stock market increased suggesting over speculation and foreign investment interest decline; fourth, the Japanese and European investors dumped $500 millions in orders to sell triggering automatic selling in portfolio insurance protections; fifth, long term bond rates rose above 10 percent to 10.4 as a dollar sell off was in progress. Germany and Japan worried about inflation at home and started raising rates; at the same time US trade deficit reached $15.7 billion. Japanese investors fleed the market dumping US bonds in attempt to get out of the dollar.
The Fed stepped in as the lender of last resort and injected high power money back into the financial system to restore confidence and the perception of stability. Secondly, the Fed convinced the inner circle of bankers to "suspend the natural state of competition and desist from the paradoxical behavior of entrenchment". The inner circle of banks started to examine customer credit and push money from their reserves back into the market. The fed oversaw the operation and made sure the financial arteries were opened up preventing a complete collaspe of the market. The seemed to learn how the lender of last resort work in practice. Carnage was high with the lost of over a $1 trillion dollars, investors could not get money to cover their margins as investment houses called in their loans. The bulk of the carnage resulted from the owners of the market insurance, pensions, and investment banks as automated trading system activated dumping massive amounts of stock producing seller ratios to 70 to 1 against buyers. The Fed did not suspend trading and thought to whether the storm.
The most serious bottleneck was the intersection of the futures and options plumbing. Futures plumbing had huge margin calls of $2.1 billion due to be paid to CME clearing house. The margin payments exceeded that amount of money four designated Chicago banks had on hand. Eventually the money was payed out. Goldman Sache release some $600 million to its institutional customers before receiving money from the clearing house. Goldman, Shearson, and Morgan Stanley were facing loses in the hundreds of millions. Speculation started that the option market clearing house might collaspe. Certain banks started restricting credit lines, imposing new loan restrictions, and declined transfer of funds to customers until they receiving covering funds. Buyers disappeared. With the futures market pointing to lower prices institutions dumped all stock still capable of being traded. The Fed did not want the market to shutdown fearing it would not be able to get it open again. First options received a continental loan for $102 million but on Black Tuesday need $138 million; comptroller from continental became rigid about relaxing firewall limits; the market panicked on new of the comprollers rigidity. The fed moved urgently to approve the loan for first option. The panic fever broke. What did this prove? "It demonstrated that the federal safety net extends beyond banking and covers securities firms" said Kenneth McLean
