Finance for Dummies

I don't know what the Federal Reserve is. I don't know what they're doing."

So admitted comedian-commentator Bill Maher on his HBO talk show a few weeks ago, expressing a sentiment that, judging by the applause, was shared by many members of his presumably well-educated, media-consuming, studio audience. One of Maher's guests, humorist Joe Queenan, also fessed up to being pig ignorant of what the Fed is and does. And earlier that same week, Eliot Spitzer, the onetime sheriff of Wall Street, told MSNBC's Dylan Ratigan that the Federal Reserve "is a Ponzi scheme, an inside job" that must be closely examined by Congress.

Spitzer was referring specifically to the New York Fed, a distinction that quickly fell away as his ready-for-prime-time sound bite shot through a blogosphere intent on viewing anything to do with finance as part of a conspiracy theory. "That scared the hell out of me," Maher told his guests. "Despite what he likes in his sex life, [Spitzer] knows a lot about this."

Maybe he does, maybe he doesn't. But one thing Spitzer clearly knows is how to play to a crowd desperate to suss out villains in a financial crisis. And let's face it, the Fed is as good a target as any. Shrouded in secrecy, the central bank, which may see its powers broadened in a regulatory overhaul, remains a mystery to many. This is true, despite the truckload of media coverage devoted to economics and finance these past few months, including a special PBS NewsHour "forum" in late July in which Fed chairman Ben Bernanke took the unprecedented step of answering questions from 40 people from Kansas City, Mo. The first query came from a social worker who asked Bernanke to explain what, exactly, is the Federal Reserve. "I don't have a clue what they do," she told the chairman.

All of this eagerly professed ignorance got me thinking: What is it about anything that has to do with money, finance or economics that enables otherwise thinking people to plead total cluelessness? After all, most people work, earn money, use banks, save for retirement. The Supreme Court is no less secretive, mysterious, complicated or powerful than the Fed, but it's pretty hard to imagine someone like Maher declaring that he has no idea what the court is or what it does. But people have no problem wearing their financial ignorance on their sleeves. They're actually sort of proud of it. "I read as much of financial coverage as I can understand," media critic Jack Shafer wrote back in late 2007. "I'm not embarrassed by my ignorance -- why should I be? I can't be much more clueless than the masters of the universe who have lost their companies billions."

Well, actually, you can be, as Queenan proved that night on Maher. Indeed, another guest, historian Niall Ferguson, called out Queenan on his ignorance (earlier, Queenan proclaimed that Obama's approval rating would be better if the Dow simply hit 10,000, healthcare, war and unemployment be damned) and proceeded to school him on the Fed and how it works. Queenan's snide response (which he repeated several times): "I didn't go to Harvard." No, he didn't, but he did once work at Forbes.

OK, now we get it: Only smarty-pants, wonkish types get this stuff. The cool kids don't know it, don't understand it, certainly don't want to study up on it, and, if like Ferguson, you do get it (and you actually teach at Harvard), you're not just elitist, you're suspect. Unaccessible. An apologist. Maybe you're even in cahoots with all those guys on Wall Street with their bailout-fueled bonuses.

The odd thing here is that many areas of finance are complex, even inaccessible, though the fundamentals, like the functions of the central bank, aren't. And it's arguably never been more important, particularly given the fact that every taxpayer owns chunks of some big banks, that ordinary Americans bone up on the subject. Instead, the attitude du jour seems to be to cheer on the notion that the Fed, which you may have the sketchiest understanding of, is a Ponzi scheme, or that Goldman, Sachs & Co. is a vampire squid that caused every bubble, or that Lehman Brothers Holdings Inc. was brought down by eight evil men who treated the 24,992 salt-of-the-earth geniuses who worked for them like crap. It's almost like folks secretly want to encourage the very thing they fear. The cartoon is so much more satisfying than the truth.

Yvette Kantrow is executive editor of The Deal

Comments

[TheCommons]

I find everything said here both completely right and completely wrong.

[sonofsamphm1c]

Americans are poorly educated. They love conspiratorial rot because it doesn't take any brains to understand them.

[WIpatriot]

OTH, some are well educated, well read, and DO understand the financial system. Defenders of the status quo pull out the 'conspiracy theory' "rot" to dismiss opponents of their position. All is not what it appears.

[sonofsamphm1c]

Your face value question pretty much makes it a lock that you don't understand finance.

[Sundialsvc4]

It isn't hard to understand Crime, Yvette.

And by now we should also know that "high crime" equals "real crime."

The "One Ring to Rule Them All" crime on this table is, "bribery." It's one of only two such crimes that our Constitution actually enumerates (Article 2, Section 4). The other one is, "treason." Hmmmmm....

We know how the story ends because we do read fairy-tales and parables. The story of Rumpelstiltskin, for instance. The story of King Midas.

Or in our case, the parable of the Prodigal Son. After all, when was it that some offstage voice finally said to the Prince, "you stink... you need a bath... game's over, time to go home?" Only when there was nowhere farther DOWN that he could go. Saved by the pig.

These people are selling-off our national treasure and trying to lug away anything that's not bolted down, and they're paying millions of dollars in ... not "campaign contributions" or some cozy-assed metaphor like that, but ... B-R-I-B-E-S to help them do it. And they're about to get even the Supreme Court to proclaim that "it's okay."

So... where's a good pig when you need one?

[CroatianCritter]

Here is Part 2!

The Federal Reserve is a private entity that functions as a government agency. Here is the Daily Kos blog about it.

http://www.dailykos.com/story/2006/12/7/221733/660

Money is only created through debt in this system. The government gave up its Constitutional right to print money and turned it over to the banking interests who basically run this nation economically. The idea of a central bank is a SOCIALIST idea. Due to its gargantuan size, it can not properly read how an economy will function and that is why the bank has been blamed CORRECTLY for the Great Depression and every bubble and recession ever since. The idea of the bank is un-American. If you need to find out more, see the movie "From Freedom to Fascism." It describes the unholy behavior of this bank in great detail. Also, support Ron Paul's bill HR1207 and S604 sponsored by my Senate hero Bernie Sanders.

[CroatianCritter]

Since you seem unaware what the central bank does, let me give you some links. First, American hero Andrew Jackson vetoed the existence of the Central bank in 1832 because he believed it was un-American. Here is what he said about it.

"Is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country? Is there not cause to tremble for the purity of our elections in peace and for the independence of our country in war? Controlling our currency, receiving our public monies, and holding thousands of our citizens in dependence, it would be more formidable and dangerous than a naval and military power of the enemy."

Here is the wikipedia entry on the Federal Reserve Act.

http://en.wikipedia.org/wiki/Federal_Reserve_Act

This is Part 1 of my post!

[petef59]

Now that the scolding is over, when does the instruction begin?

[bluenred4now]

This is a great post on an important subject, and the author is right: people don't understand how finance and financial systems / institutions work within the greater context of society and the global economy. However, it would be nice if the author could point the reader to information that would educate them in the area. The title is "Finance for Dummies," but nothing about how finance or The Fed works is discussed. Now that the subject has been introduced, maybe the author can provide some resources to help us overcome our financial ignorance in her next post.

[seatea1967]

Excellent post outlining the function of the Federal Reserve. I never imagined it could be explained so clearly! It makes me wonder why nobody has written such an informative article before.

Clearly the author has a deep understanding of the complexities of the financial system, but the ability to relate such intricate topics in an easy-to-understand manner is a rare gift indeed.

[WIpatriot]

Oh, clearly.

[jsarets]

The Federal Reserve is an inverted Ponzi scheme. Instead of relying on exponential growth of new investments to pay returns on existing investments, it relies on exponential growth of new loans to earn returns on existing loans.

Ponzi schemes collapse when there aren't enough new investors. The Fed would collapse if there weren't enough new borrowers. But the Fed uses the U.S. Treasury as a borrower of last resort.

My advice for newbies wanting to take a trip down the rabbit hole of financial capitalism is to read Ellen Brown's outstanding "Web of Debt". Warning: may cause profound anger and disillusionment.

[WIpatriot]

Or "Creature From Jekyll Island."

[guard]

The words "conspiracy theory" have been used so much that they no longer have any meaning. There is nothing left in them but vague emotional content. Even when there is obvious, explicit collusion the whole affair can be dismissed by just repeating the words "conspiracy theory" a few times.

[petef59]

Culture of fraud through incentivized bonuses might be more apt?