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The original was posted on /r/gmecanada by /u/CriticalMushroom8812 on 2024-11-03 13:43:58+00:00.

Introduction: The True Purpose of the Federal Reserve

The Federal Reserve, created in 1913, claims to be a stabilizing force in the U.S. economy. However, beneath this mission lies a powerful machine for wealth extraction that consistently benefits financial elites over ordinary Americans. The Fed’s unique public-private structure grants Wall Street banks like JPMorgan Chase and Wells Fargo direct involvement in the Federal Reserve system, allowing them to profit regardless of economic conditions.

Commercial banks holding stock in the 12 regional Federal Reserve Banks receive an annual, risk-free dividend of 6%—a guaranteed payout established by the Federal Reserve Act of 1913. These dividends and decision-making influence mean banks gain from Fed policies, even as these policies widen wealth gaps and strain the public. Nowhere is this more apparent than at the New York Federal Reserve (NY Fed), the nerve center for Wall Street and the primary force behind Fed market operations. The NY Fed’s actions consistently align with the needs of major banks, reinforcing a system where financial elites profit while average Americans struggle to keep up.

Mechanisms of Wealth Extraction

Here is a breakdown of how the Fed’s actions create a system where policies benefit financial elites at the expense of everyone else.

1. Quantitative Easing (QE): Inflating Asset Prices for the Wealthy, Leaving Ordinary Americans Behind

Mechanism: Quantitative Easing (QE) allows the Federal Reserve to buy government bonds and mortgage-backed securities, crediting these purchases to banks’ reserves rather than injecting cash directly. Although marketed as a stimulus tool to lower borrowing costs and spur the economy, QE largely acts as a cash injection for banks, freeing them from major losses. In essence, the Fed buys these bonds from banks at their current market value, injecting liquidity into the system and supporting asset prices. This process helps stabilize financial markets and prevents further devaluation, allowing banks to maintain liquidity without facing potentially greater losses from a market downturn.

Evidence: From 2008 to 2014, during the Fed’s QE program, asset values surged. The S&P 500 rose by 140% [2], while the Case-Shiller Home Price Index grew over 30% [3]. Meanwhile, median wage growth lagged, increasing by just 11% [4]. The wealthiest 10% of Americans, who hold around 89% of all stocks [5], saw substantial gains as asset prices inflated, while most Americans, with few or no assets, were left behind.

• Who Benefits: Banks and wealthy investors. Banks avoided significant losses, and wealthy investors reaped gains from rising stock and real estate prices, enhancing generational wealth.

• Who Loses: Middle- and lower-income Americans, who primarily rely on wages. With limited assets, they gain little from rising asset values. Meanwhile, inflated home prices make housing less accessible, and stagnant wages prevent them from closing the wealth gap.

1. Low-Interest Rates: Fueling Speculation and Inflating Asset Bubbles

Mechanism: For over a decade, the Fed has maintained historically low-interest rates, intended to stimulate economic growth. While low rates encourage borrowing, they also incentivize high-risk investments and asset speculation, fueling bubbles in stocks and real estate. Ordinary savers, however, earn little to nothing on traditional savings accounts, and when inflation rises, their purchasing power erodes further.

Evidence: Between 2010 and 2020, low rates contributed to a 75% increase in home prices [6]. At the same time, inflation-adjusted savings returns dropped significantly, and median rent increased nearly 45% during this period, making stable housing unattainable for lower-income families.

• Who Benefits: Corporations, wealthy investors, and financial institutions that leverage cheap credit to expand portfolios. Speculative buying drives up asset values, concentrating wealth among asset holders.

• Who Loses: Middle- and lower-income Americans who rely on traditional savings. Eroding purchasing power and rising costs of essentials mean they’re unable to accumulate wealth or afford high living costs.

1. Repo Market Interventions: Quiet Bailouts for Banks

Mechanism: The Fed’s interventions in the repo market provide emergency liquidity to banks through repurchase agreements. In these arrangements, banks “sell” securities to the Fed to receive immediate cash, then buy them back shortly afterward, avoiding asset liquidation.

Evidence: During the 2019 repo market crisis, the Fed injected over $100 billion to support banks facing cash shortages, effectively bailing out major financial players without public scrutiny.

• Who Benefits: Large financial institutions, which gain liquidity support during crises, effectively insulating them from market downturns.

• Who Loses: The public, which indirectly funds these interventions through inflationary pressures and increased financial instability. Small businesses and individuals lack comparable protections or emergency liquidity.

1. Bailouts and Moral Hazard: Shielding Banks from Consequences

Mechanism: The Fed’s role in repeatedly rescuing banks during crises creates a “moral hazard,” where financial institutions feel secure in engaging in risky behavior, knowing they’ll be shielded from failure. Programs like the Troubled Asset Relief Program (TARP) in 2008 demonstrate this pattern, as banks that engaged in risky practices were saved by taxpayer-funded bailouts.

Evidence: TARP allocated $700 billion to rescue large financial institutions, enabling banks to return quickly to profitability while ordinary Americans faced prolonged unemployment and stagnant wages. Despite playing a role in causing the financial crisis, big banks emerged stronger, thanks to Fed intervention.

• Who Benefits: Large banks and corporations with risky portfolios. The promise of a bailout encourages aggressive strategies, allowing these institutions to profit without fear of consequences.

• Who Loses: Taxpayers and small businesses, who endure economic instability and receive limited protections. Bailouts increase the national debt and divert funds that could otherwise support the public.

1. Continuous Net Settlement (CNS) at the DTCC: Deferred Accountability for Large Institutions

Mechanism: Continuous Net Settlement (CNS), operated by the Depository Trust & Clearing Corporation (DTCC), is a clearing process that allows large financial institutions to net out their trades, meaning they only need to settle the net difference rather than pay for each transaction individually. This system reduces the immediate cash required to settle trades, granting significant liquidity flexibility to large institutions. The Fed indirectly supports this system by providing liquidity to these institutions through the repo market, enabling them to maintain cash flow to meet CNS obligations without significant financial strain.

Evidence: The DTCC’s CNS system processes trillions of dollars in trades daily, allowing major banks to hold on to more cash and maintain leveraged positions for longer periods without the need for daily cash settlements. By reducing cash demands, CNS effectively insulates these institutions from liquidity risks that smaller investors must address immediately.

• Who Benefits: Large financial institutions with substantial trading portfolios gain liquidity flexibility. This allows them to operate with lower cash reserves, enabling greater leverage and extending speculative or high-risk positions with less immediate accountability.

• Who Loses: Smaller institutions and retail investors, who must settle trades fully on a daily basis, face greater financial exposure and volatility risks, leading to an uneven playing field in the financial markets.

1. Money Printing and Inflation: Shifting the Burden to the Public

Mechanism: The Fed’s money printing during crises aims to prevent economic collapse but devalues the dollar, reducing purchasing power for wage-dependent and fixed-income Americans. Wealthier individuals with assets like real estate and stocks see their holdings appreciate, while average Americans face rising costs.

Evidence: From 2008 to 2022, the M2 money supply tripled, while wages rose only 30% during this period. Essential goods, such as housing, food, and healthcare, have seen drastic price increases, diminishing purchasing power for ordinary Americans.

• Who Benefits: Asset-rich individuals, whose holdings grow with inflation, preserving and enhancing their wealth.

• Who Loses: Wage earners, retirees, and low-income families, who see their purchasing power decline as prices rise faster than incomes.

1. Concentrated Power at the New York Fed and Lack of Transparency

The New York Fed, the primary force behind Fed market operations, maintains a cozy relationship with Wall Street. The “revolving door” between NY Fed officials and Wall Street firms breeds conflicts of interest, aligning policies with the needs of major banks. For example, former NY Fed President William Dudley previously worked for Goldman Sachs, exemplifying this close relationship. The public rarely learns of the full scale of Fed interventions until years later, shielding financial institutions from scrutiny and accountability.

Conclusion: A System Designed for Wealth Extraction

The Federal Reserve and DTCC operate under a framework t…

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