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 [1]. 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.
- Quantitative Easing (QE): Inflating Asset Prices for the Wealthy, Leaving Ordinary Americans Behind
Mechanism: Quantitative Easing (QE) allows the Fed to buy government bonds and mortgage-backed securities, pumping liquidity into financial markets. While QE is meant to lower borrowing costs and stimulate the economy, it disproportionately inflates asset prices. As asset values rise, the wealthiest Americans—who own most stocks and real estate—reap the benefits, while average Americans, with few assets, are left behind.
Evidence: During the 2008–2014 QE period, the S&P 500 rose by 140% [2], while the Case-Shiller Home Price Index surged over 30% [3]. Meanwhile, median wage growth only increased by 11% [4]. The top 10% of Americans, who own roughly 89% of all stocks [5], saw their wealth grow significantly, while most Americans saw little improvement in their financial standing.
• Who Benefits: Wealthy investors and corporations with substantial asset holdings. Rising stock prices and home values boost their net worth, securing generational wealth. • Who Loses: Middle- and lower-income Americans, who rely on wages rather than assets for income. Rising home prices make housing unaffordable, and wage stagnation prevents them from catching up.
- 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 [7].
• 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.
- 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 [8].
• 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.
- 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 [9]. 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.
- 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 [10]. 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.
- 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 [11]. Essential goods, such as housing, food, and healthcare, have seen drastic price increases, diminishing purchasing power for ordinary Americans [12].
• 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.
- 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 [13]. The public rarely learns of the full scale of Fed interventions until years later, shielding financial institutions from scrutiny and accountability [14].
Conclusion: A System Designed for Wealth Extraction
The Federal Reserve and DTCC operate under a framework that claims to stabilize the economy but in practice concentrates wealth and power among financial elites. Mechanisms like QE, low-interest rates, CNS, and repo interventions aren’t just neutral tools—they are wealth-concentrating policies that consistently benefit financial elites while shifting risks and costs to the public. True reform would require transparency, accountability, and restructuring of the Fed’s priorities to serve all Americans, not just the insulated financial elite.
TL;DR
How the System is Rigged: The Federal Reserve as an Engine of Wealth Extraction
The Federal Reserve, supposedly created to stabilize the U.S. economy, has instead become a powerful tool for wealth extraction, benefitting Wall Street banks like JPMorgan Chase and Wells Fargo while leaving ordinary Americans behind. Through mechanisms like Quantitative Easing (QE), low-interest rates, repo market interventions, and Continuous Net Settlement (CNS), the Fed inflates asset prices, favors high-risk speculation, and insulates large banks from downturns. The New York Fed’s cozy relationship with Wall Street only deepens this bias. In the end, policies designed to “protect” the economy often result in widening wealth gaps, where financial elites profit while most Americans struggle. True reform would mean real transparency, accountability, and policies that serve all Americans, not just the privileged few.
References 1. Federal Reserve Act of 1913 – Section 7. Dividend Requirements on Federal Reserve Bank Stock. U.S. Government Publishing Office, 1913. Relevant text on dividends is typically found in the original act text, specifically on page 17 of commonly available annotated versions. 2. S&P 500 Index (2008–2014) – For historical data, refer to Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis. Search “S&P 500 Historical Prices, 2008–2014.” Visit the FRED website at https://fred.stlouisfed.org/ for verified data tables. 3. Case-Shiller Home Price Index (2008–2014) – Data available from S&P Dow Jones Indices report. “S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index” 2008–2014. Accessible via https://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller/, usually in the National Home Price NSA Index tables, page 3. 4. Median Wage Growth – U.S. Bureau of Labor Statistics (BLS). Occupational Employment Statistics, 2008–2014. See wage trends section in summary reports, typically found on pages 4-5. Available at https://www.bls.gov/. 5. Distributional Financial Accounts of the United States (Asset Ownership by Wealth Percentile) – Federal Reserve. Refer to Table A3 in the Financial Accounts of the United States, Z.1 Release. Page 41 in Q4 reports generally contains data on wealth distribution and asset ownership. https://www.federalreserve.gov/. 6. Home Price Increases (2010–2020) – FRED. National Home Price Index data can be sourced from the Federal Reserve Bank of St. Louis. Specific tables on U.S. home price appreciation by year found in data section. Visit https://fred.stlouisfed.org/, search “National Home Price Index.” 7. Median Rent Increase – U.S. Bureau of Labor Statistics. Consumer Expenditure Survey, 2010–2020, page 22 for tables on rent costs. https://www.bls.gov/cex/. 8. Repo Market Interventions (2019) – Federal Reserve Bank of New York, Operations Statements and Market Analysis. Refer to the September–December 2019 statements, typically found in the Open Market Operations Summary, page 8-12. Available at https://www.newyorkfed.org/. 9. Troubled Asset Relief Program (TARP) – U.S. Department of the Treasury. TARP Monthly 105(a) Report to Congress, January 2009 edition, page 4 (summarizing bailout fund allocations and bank benefits). Find these reports at https://home.treasury.gov/. 10. Depository Trust & Clearing Corporation (DTCC) Continuous Net Settlement – DTCC. Annual Report 2020, page 15, where CNS functions and volumes are detailed. The DTCC publishes regular updates at https://www.dtcc.com/. 11. M2 Money Supply Growth (2008–2022) – Federal Reserve Economic Data (FRED). Access M2 data on page 9 of quarterly monetary policy statements from the Federal Reserve Bank of St. Louis. Search directly for “M2 Money Supply” at https://fred.stlouisfed.org/. 12. Consumer Price Index (CPI) Increases – U.S. Bureau of Labor Statistics. Monthly CPI Summary Reports, 2008–2022, with detailed tables typically on pages 6-7. Available via https://www.bls.gov/cpi/. 13. William Dudley’s Career Background – NY Fed and Goldman Sachs career history. “Biographies of Key Individuals,” available on https://www.newyorkfed.org/, including his prior employment history in Federal Reserve Annual Reports, often in footnotes on the organization’s leadership sections. 14. Government Accountability Office (GAO) Audit of the Federal Reserve – GAO, “Federal Reserve System: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance,” Report GAO-11-696, released July 2011. Key details available in Appendix IV on page 76. https://www.gao.gov/.