What Is The Federal Reserve Doing?

I firmly believe that the federal reserve is using all kinds of shenanigans to manipulate the economy, primarily for the benefit of the banks and the federal government. The ways in which this manifests itself are plenty. In this blog I will explore one that actually is actually a flash back to another era.

In the 1920's, american corporations were flush with cash on their balance sheets and were not big users of bank credit. The federal reserve and it's member banks did not like this fact. From 1922 through 1928 the amount of corporate loans, as a percentage of their inventories fell from 17% to 8%. So they acted by lower the interest rate to encourage corporation into taking out more loans instead of using cash from operations for expansion, as was becoming the norm. The mechanics of how they did this, the effects, and results on corporate lending have been detailed thoroughly by Milton Friedman,  Murray Rothbard, and others. The bottom line is the decade long angst the large banks felt was reversed shortly there after.

Today it seems the same thing is replaying itself. The federal reserve bank seems to be again using this lever of low interest rates to encourage corporations to borrow. The corporate indebtedness is dropping as a percentage of GDP and with only the federal government providing debt for banks to finance. Even with the spread on the borrowing, banks are still having problems with their margins. They need this type of borrowing to increase their profit margins.

This is far from a solid theory but given the influence banks have on the fed, and the extent that they go to accommodate them, I would venture to say it is a large influence. There are many reasons that point to the federal reserve increasing rates, and this may be one of many that explain why they don't. Ultimately with rates at .25 basis points, it is hard imagine how more can be done.