Friday Rant: Welcome to the Fourth Branch of Government — The Fed

If you can think back to high school civics -- or perhaps an introduction to American history or political science class in college -- you'll recall (we hope) that the US government is based upon a system that relies on distinct branches of government. Let's play Schoolhouse Rocks for a second as we go down historical memory lane. As you all know, the original Constitution established three branches that would comprise our federal government: the Executive, Legislative, and Judicial. Every branch is provided with a system of checks and balances, or methods to keep any one branch from becoming too powerful.

The Executive branch is comprised of the President, Vice President, and appointed cabinet members. The Executive branch has the power to veto bills made by congress and to nominate federal judges to the Supreme Court.

The Legislative branch, containing the 100-member Senate and proportional (by state population) House of Representatives, proposes and passes laws. The House and Senate can override a president's veto and reject judicial nominations. Interestingly, for you history buffs, the founding fathers did not believe that citizens should elect the Senate directly, but rather the good men (and they were all men) of the individual state legislatures were tasked with putting forth their state's election. This, however, changed with the passage of the Seventeenth Amendment to the Constitution.

Last but not least is the Judicial Branch, consisting of the nine judges on the Supreme Court. They can declare laws made by Congress and the President unconstitutional.

As a wrap up, in very simple terms, the House and Senate write laws, the President enforces them, and the Supreme Court upholds them. The Constitution establishes the Legislative branch in Article I, the Executive in Article II, and the Judicial in Article III.

The purpose of this rant is not to get into the origins of the Fed (if you have time this weekend, we both find it fascinating to read the debate, vitriol and bullets that went back and forth between Jefferson and Hamilton -- and Jefferson's proxy, in the case of lead slugs -- debating the prospects of a central bank) but rather to suggest that the Fed's role has never been to legislate, enforce or uphold laws. Why is it, then, precisely what it did with the most recent quantitative easing move (also known as QE2)? Our sister-site MetalMiner, recently opined that QE2 may have been an ingenious move because "we can now avoid a direct confrontation with China whether it occurs at the WTO, via the State Department or a Congressional legislative debate. You see, if you run the printing presses as we are, we get a devalued currency. In other words, if China refuses to raise their currency, we can just lower ours. In fact, we just did. Discussion over." In other words, like it or not, the Fed seems to have become the "fourth branch of government" (should we say this pejoratively, or not?). It's a new branch that we can criticize, but we literally can't vote out of office (or off the bench).

Looking through an economic and self-preservation lens, we're personally tossed up on the move for a whole lot of reasons -- Jason is stocking up on bullion, canned goods and ammo; Sheena is installing yet another extra lock on her apartment door -- especially given the potential for significant monetary and commodity inflation. Even though the Fed claims it can mop up all the liquidity it's created, we're not so sure. And we're even more concerned that the Fed may quietly slip in to operate as an unchecked branch of government without any formal say-so (or complaint from the general population, who may not realize it's happened). Furthermore, what will the move ultimately mean for the country (even if it was a marvelous, underhanded swipe at China)?

As Zerohedge puts it in a post titled "Requiem for America", "[Thanks to the Fed] we've just embarked on something called QE2, with the association of its name (a cruise ship on vacation) a cruel joke. QE2 is an academic's solution to a problem whose only real solution is a realization that real gain only comes from real sacrifice. QE2 is an economist's answer. Like most every economic theory -- economics is a dismal science at best, alchemy and fraud at its worst -- it starts with an assumption. In the case of QE2 this is: assume infinite money." Or, really, infinite Fed power.

- Jason Busch and Sheena Moore

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