Like all indoctrinated economics PhDs, I used to teach students that the Federal Reserve was created as a central bank in order to provide cash to banks experiencing a run on deposits so that bank failures would not become general and collapse the money supply and, thereby, employment and output. It all sounds so reasonable and rational until you realize that finance least of all is idealistic. The Federal Reserve was actually created in order to save the big New York banks from their greed-driven mistakes, and that is the Fed’s principal activity. In recent decades the Fed has gone beyond merely saving the big banks from their mistakes to helping the big ones concentrate more banking into their hands. The Fed causes banking crises and then provides funds for the big banks to absorb the troubled regional banks. The Fed’s current policy of raising interest rates after a decade of negative interest rates has the entire banking system insolvent. This resulted in runs on the banks, which the Fed did not save by expanding reserves, instead permitting failure and acquisition. Obviously, what I had been trained to teach was false.
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