A Review of the Video “The Federal Reserve: Inside the Most Powerful Financial Institution on Earth”

The Federal Reserve (FED), at the heart of the world’s most powerful financial organization, has played a pivotal role in Wall Street’s relationship with the dollar. However, the dollar now seems to be on a downward trajectory.

FED: The Knife That Cut Its Own Handle

The dollar, the greatest achievement in monetary history, is a piece of paper produced at minimal cost and backed by no resource other than U.S. governmental financial bodies, such as Congress. Despite this, it has maintained a monopoly on power and respect, securing its position as the world’s most dominant currency. Central to the dollar’s success is the Federal Reserve (FED) and its relationship with Wall Street. This article seeks to decode the secrets behind this “sacred paper.”

The information presented here is based on the YouTube channel FD Finance’s video, “The Federal Reserve: Inside the Most Powerful Financial Institution on Earth.”

In 1971, the global financial system underwent a seismic shift when the gold standard for the dollar was abandoned. This change led to a decline in the value of all central bank currencies, especially those tied to the U.S. dollar as their benchmark. Today, all currencies operate under the influence of the Federal Reserve, the central bank of the United States.

As the world’s reserve currency, the U.S. dollar measures time, production, and labor value. It relies on trust and confidence in the U.S. government—two factors that effectively vanished in 2007.

The Federal Reserve’s Approach to the 2007 Crisis

The 2007 financial crisis saw rising interest rates, a housing market explosion, and surging household costs. These led to increased citizen debt, higher rental rates, and a drop in homeownership.

Believing it to be a minor issue, the Federal Reserve allowed inflation to escalate. To prevent the economic collapse of banks and the government, the FED continued raising interest rates. Unable to resolve the crisis, Congress relied on the Federal Reserve to stabilize the economy—a daunting task.

The FED exercised its governmental authority to authorize unlimited money production, injecting trillions of dollars into financial institutions through loans.

This controversial measure aimed to rescue major corporations and banks teetering on the edge of bankruptcy.

Former FED Chair Janet Yellen remarked, “The Federal Reserve was established in 1913 to inject liquidity into the U.S. financial system during sudden economic crises, acting as a full-authority backstop when needed.”

Surprisingly, surveys show most Americans have little understanding of the Federal Reserve’s functions.

Even among its own members, differing views exist regarding its responsibilities, often resulting in vague explanations.

What is the Federal Reserve’s Primary Mission?

The FED is tasked with controlling the money supply by adjusting interest rates and regulating banking laws. It also oversees the health of the U.S. financial system.

Former FED Vice Chair Alan Blinder (1994–1996) provided a clearer definition: “The FED’s role is to ensure financial system stability amidst market chaos. It excelled at this role until the summer of 2008 when chaos spiraled out of control.”

What Happened to the Richest Government in 2008?

The Federal Reserve was at the eye of the storm that engulfed the global economy. By keeping interest rates low for too long, the FED triggered a liquidity crunch and a housing bubble. Despite repeated warnings, the FED failed to deflate the bubble, and unemployment then soared to a 25-year high.

Former FED executive Peter Fisher (1994–2001) dismissed conspiracy theories, attributing the economic collapse to poor decision-making. Many members of the organization have since acknowledged this.

The real currency in the world is “trust.” When trust erodes, the economy crumbles. In recent years, the FED has drawn lessons from past errors and global financial collapses to shape the future of the U.S. economy.

The Birth of the Federal Reserve

In the past, there was a nation called Great Britain, now referred to as the United Kingdom (UK) or Britain. This country once had a precious national currency because every single banknote was backed by gold. Consequently, its currency enjoyed immense credibility worldwide. People could visit branches of the Bank of Britain and exchange their banknotes for physical gold.

Thus, the gold standard served as a reliable medal of honor for banknotes, ensuring their long-term value retention and that the volume of banknotes did not exceed the gold reserves in the treasury.

With the onset of World War I in 1914, governments began printing money to cover war expenses, disregarding the gold standard. As Britain went bankrupt, Germany’s economy was also destroyed by hyperinflation. This was when the newly born Federal Reserve (1913) and its currency, the dollar—backed by gold—seized a golden opportunity to become the world’s financial superpower and stepped into the field.

Bill Poole, President of the Federal Reserve Bank of St. Louis from 1998 to 2008, described the Federal Reserve in a fascinating way: “In reality, the Federal Reserve has the power to produce as much money as it desires at any time. However, if you and I were to print money in our basement, we would be arrested for counterfeiting. But when the Federal Reserve prints money, it is called monetary policy.”

What Is Federal Reserve Monetary Policy?

When the Federal Reserve uses its power to create or remove money to increase or decrease interest rates, this is called monetary policy. For example, if it creates more money, the public has greater access to funds, and interest rates drop. In this scenario, people are less inclined to save and prefer to spend their money.

Conversely, when interest rates rise, people tend to spend less and prefer to deposit their money in banks to earn interest.

Higher interest rates slow down economic activity, thereby reducing inflation. Lower interest rates, on the other hand, act as an economic stimulus, encouraging people to engage in economic activities rather than save. In essence, raising interest rates is like pressing the brake pedal, while lowering them is akin to stepping on the gas pedal.

From the 1920s onward, the United States steered its economy using this method. However, the approach failed and ultimately led to the Great Depression—a phenomenon that began in the U.S. in the summer of 1929, a decade before World War II, and quickly spread to other countries.

The Great Depression

The roaring economic boom of 1920s America resulted from innovative measures by the Federal Reserve. Initially, by lowering interest rates, the Federal Reserve inadvertently strengthened the stock market, and brokers borrowed more than ever before.

Over time, warning bells sounded for the Federal Reserve. In 1928, it dramatically raised interest rates, triggering a recession and a subsequent stock market crash. At this point, the Federal Reserve made the right decision by injecting liquidity, preventing a banking panic or Bank Run.

A banking panic occurs when a large number of customers simultaneously rush to banks to withdraw their deposits or convert them into more valuable assets, fearing the banks’ inability to meet debts. This often depletes bank liquidity and sometimes results in total bank failure.

Washington’s board of directors became concerned about the expansionary policies of the Federal Reserve, fearing these measures might reignite speculative bubbles and inflation over the long term. As a result, the Federal Reserve ceased its expansionary policies, plunging the banking system into another crisis. This time, the Federal Reserve took no action, worsening the situation.

Banks failed, people continued withdrawing deposits, and eventually, the economy collapsed entirely.

One of the primary reasons for this collapse was the inability to produce money due to adherence to gold standards. Instead of injecting money, the Federal Reserve ordered liquidity reductions, turning commercial prosperity into the Great Depression.

Although the Federal Reserve wasn’t deemed responsible for causing inflation, its inability to address the root causes made it accountable for the catastrophic event.

To rectify its failures during the Great Depression, the Federal Reserve took a different approach during the 2008 crisis by injecting money and increasing liquidity. This time, instead of a depression, the country faced Great Inflation. The second crisis wasn’t due to a lack of liquidity but rather an oversupply of it.

The Black Year of 1971: Mistake or Conspiracy?

The 1960s economy was stable and prosperous, with no inflation and low unemployment, leaving both citizens and economists content. However, a significant underlying issue remained.

President Lyndon Baines Johnson’s “Great Society” program and the Vietnam War drastically increased government expenditures, leading to organized inflation in the U.S.

To preserve the dollar’s value, Federal Reserve Chairman Bill Martin (1951–1970) raised interest rates, but Johnson opposed the move. Instead, he opted to cut the Great Society program to avoid economic recession. However, rising war costs and excessive money printing spiraled out of control. By 1971, the real value of $100 dropped to just $73.

In a grim economic milestone, Johnson announced on television that converting dollars to gold would temporarily cease. This officially ended the gold backing of the dollar, leaving its value dependent solely on the U.S. government’s assurance.

From this point onward, the U.S. government’s commitment to maintaining the value of the dollar depended solely on the behind-the-scenes policies of the Federal Reserve. Within a decade of this decision, the value of the dollar dropped to less than half, or in other words, the cost of living increased by over 100%.

The trend of rising prices continued into the presidency of Jimmy Carter (James Earl Carter) to the extent that reducing production and money supply was proposed as an alternative to increasing liquidity or raising interest rates. This was because the interest rate hikes, which had reached as high as 20% at the time, did not help the U.S. economy, and unemployment rates had skyrocketed.

In 1981, unemployment surpassed 10%, leading to a severe economic recession. At this point, both global and domestic trust in the Federal Reserve had completely eroded. Consequently, the U.S. government agreed to a fundamental shift in Federal Reserve policymaking.

The Great Moderation

From 1981 to 2007, the Federal Reserve entered its golden era, characterized by mild recessions and carefully measured expansionary policies. This period, known as the Great Moderation, marked economic growth, reduced unemployment, and increased stock prices. Global and domestic trust in the Federal Reserve surged, cementing its reputation as an economic powerhouse.

Asset Inflation

Despite its successes, the Federal Reserve faced a new challenge: asset inflation, where the prices of stocks, bonds, and real estate surged without a corresponding rise in commodity prices. Wall Street dubbed this the Bull Market.

Black Monday

During the peak days of the U.S. market, Alan Greenspan, Chairman of the Federal Reserve from 1987 to 2006, who is considered one of the most powerful and popular figures in the economic and political history of the United States, noticed early in his tenure (1987) the suspicious and bubble-like nature of asset prices. However, the market ignored Greenspan’s concerns, and everyone dismissed this significant warning.

In October of the same year, Black Monday shook the U.S. stock market, marking a historic 508-point (22.6%) drop in the Dow Jones Industrial Average. At this critical juncture, Greenspan stepped in with a strategy dubbed the Greenspan Put by Wall Street, successfully managing to stabilize the situation.

The Greenspan Plan and Its Connection to Wall Street

The Greenspan Plan effectively allowed the Federal Reserve to intervene during sudden market downturns by injecting immediate capital to prevent significant declines. This was executed through intense speculation led by Wall Street investment banks, which extensively used repurchase agreements to create successive price bubbles.

The banks overused this plan to such an extent that they faced severe challenges in repaying debts during the 2007–2008 crisis, leading some to declare bankruptcy.

The root of the problem was the rise in housing prices driven by banks’ speculation and the reckless granting of loans without assessing borrowers’ repayment capacities. When the housing bubble burst, the number of individuals indebted to the banking system surged, and their mortgaged homes, intended as collateral, could not be liquidated.

At this point, the Federal Reserve continued to lower interest rates, bypassed banks, and purchased securities in the open market to inject liquidity directly into the economy.

Thus, the economic policies implemented under Greenspan, which had ensured the Federal Reserve’s success in controlling the U.S. market for 20 years, suddenly collapsed, leading to the greatest financial crisis since the 1929 Great Depression.

Greenspan, long regarded as the economic superhero of the United States, admitted his mistake in reducing government oversight on bank lending. In his view, the central bank, the Securities and Exchange Commission, and the Treasury Department all played roles in these errors.

He also revealed that as early as mid-2005, he had explicitly warned U.S. policymakers and legislators about the potential for such a crisis in the near future, but the warnings were largely ignored.

The flames of this crisis spread to Europe and Asia, provoking widespread reactions.

Germany’s Finance Minister, Peer Steinbrueck, commented on the global repercussions: “After the recent financial crisis, the world will no longer be what it was before. The prevalent American belief that markets do not need regulation has been the cause of this crisis. The global financial crisis will have profound consequences. No one should delude themselves— the world will no longer be what it was before the crisis. One of the outcomes of this crisis will likely be that the United States loses its position as the superpower in the global financial system.”

Quantitative Easing

Quantitative easing, or large-scale asset purchases, is an unconventional monetary policy used by central banks to prevent declines in the money supply when standard monetary policies prove ineffective.

A central bank engages in QE by purchasing specific financial reserves from commercial banks and other private institutions, increasing the monetary base. This approach differs from the usual practice of buying or selling debt securities to maintain market equilibrium at a set interest rate.

The main challenge arises if the need for QE is overestimated, leading to excessive inflation. Conversely, if banks are unwilling to lend to households and businesses, QE may not increase demand. Even so, QE can facilitate the process of debt reduction; however, there is a time lag between monetary growth and inflation.

If the economy grows faster than the money supply resulting from QE, inflation risks are mitigated. Increased production due to a greater money supply may also boost the currency’s value, even with more money in circulation.

For instance, if a country’s economy aims to significantly increase production relative to debt-based income, inflationary pressures may balance out. This can only occur if member banks lend out the extra cash reserves rather than hoarding them.

When economic output is high, the central bank can reverse QE by restoring reserves to higher levels through interest rate hikes or other tools. Economists like John Taylor argue that QE undermines predictability.

Since increased bank reserves (considered surplus reserves) may not immediately boost the money supply, there is a risk that lending those reserves later will cause inflation.

QE benefits debtors by reducing interest rates, meaning they owe less on their debts. However, it directly harms creditors, as lower interest rates yield less income. Additionally, currency devaluation directly impacts importers and consumers, as the cost of imports rises with a weaker currency.

Unfair Wealth Distribution

Extremely low interest rates and QE have benefited property owners at the expense of those who cannot even afford to own a home. The Federal Reserve’s policies have led to the most significant consequence: unfair wealth distribution. According to data released by the Federal Reserve itself, it is evident that the rich are becoming richer, and the poor poorer.

Final Thoughts

The situation does not end here. Manipulating interest rates, contractionary policies, financial stimuli, and excessive money printing have doomed the dollar. Speculation and global debt repayments through money printing had already set the dollar downhill. Many prominent economists are waiting to introduce a new global currency.

The question remains: if the Federal Reserve is aware of this, why does it deliberately push the dollar toward destruction? If unaware, how has it managed to dominate global economic giants for decades and maintain its immense credibility with the U.S. government?