Let's first assess that Milton Friedman changed his mind several times during his carreer. First he was for Keynesian monetary policy ("stimulance"), then he was very much against it for most of his carreer (classical "inflation control") and then in the end, he was more or less for it again. He may have been one of the most influential economists of the 20th century, but he certainly wasn't the most consistent.
Friedman's ideas moreover were very much adopted by the Reagan administration. And also Thatcher in the UK. It was under Reagan and Thatcher, in fact, that the US and UK governments started letting go of control over the financial markets and it was also under Reagan that the current US government debt crisis was born.
So there goes your point already about "an institution created in secret by banksters, that caused two of the worst economic recessions/depressions in US history, was created to stop exactly what it later caused". The Fed was not created "in secret" but was set up by LAW of CONGRESS. And it did NOT cause "two of the worst rercessions/depressions in US history".
It is correct, that it was set up to deal with those kind of economic cycles as best as possible for the nation's well being. And so you can disagree on whether they have done so, or not. But you cannot just talk sensational nonsense.
So at the end of his life, Friedman came back on some of his long time mistakes of focusing too much on classic inflation control and not also stimulance, to blame just the government for the Great Depression and not also the Fed, and to oppose other price control mechanisms like wages as "too much government", instead of also embracing those. Why do you think he did that?
When you read closely what he says, he says that the Fed initially did not actually cause that already deep economic recession, but that its monetary policies at the time were so bad, that it was turned into a severe depression.
Now what were those terrible policies by the Fed at the time? They were NOT Keynesian, like the current Fed and Obama's policies are now (but Congress blocks). The Fed back then did not want to lower interest rates much, did not want to bail out many of the failed banks and did not want to put more money into the economy to stimulate (job) growth and tackle the recession.
NOPE: not willing to help out (especially many smaller) banks and afraid of inflation going out of control, they did the OPPOSITE. They did not lower interest rates to make it much cheaper to borrow money and get the system rolling again, they did not bail out bad banks, but instead let them go down, including all the savings money they carried and thereby they also did not pump enormous amounts of money into the economy, but instead took an enormous amount out of it, leading to one the biggest downturns in the US economy, plus the world, ever. See also:
And what happened is that [the Federal Reserve] followed policies which led to a decline in the quantity of money by a third. For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing from beginning to end, with millions of people having their savings essentially washed out, that decline was utterly unnecessary.
THAT is what deepened that recession into a depression, but it wasn't the underlying cause. That was an already very weak economy, enormous unemplyment, terrible economic government policies and an unreliable banking and Fed system still leading to uncontrollable bank raids, many banks failing and thereby the loss of enormous amounts of money and wealth.
These days, what do we see the Obama administration and the Fed try to do (but the republicans oppose)? Like true Keynesians they try to stimulate the economy out of the recession.
So, no the Fed is not the cause of this crisis, nor of the great depression. It DOES play a very important part in both, true. In the first a bad and currently a more positive one. But they are not "the cause".
The true causes of the current crisis lie in RR's policies, that started the deregulation of the financial markets and that were completed under GWB II, as well as in institutionalised greed by many of the big financial players, as well as with many millions of ignorant and careless consumers.
[Edited 10/31/11 15:44pm]