It is important to remember during the media hoopla that the Federal Reserve is NOT the federal government. The Federal Reserve is a government chartered but yet privately owned bank, being owned by the member banks of the Federal Reserve System. In short, it is complicated, but the AIG deal is not a government bailout, but an out of court receivership by the Fed as its largest creditor. The Fed’s funds come from deposits made by private member banks and purchases of Fed stock, as well as fees and interest it charges on loans. The Fed is self supporting and its excess funds are paid to the U.S. Treasury if the Fed chooses not to keep them. Does a government keep a balance sheet entry of paid in capital? Nope. Does the Fed? Yep. In any event, it is a horrible misconception that the Fed’s money is tax money. Well, it just isn’t.
Now, I am not a big fan of the Fed as it leaves bankers largely in charge of the economy, rather than the government, but we’ve tried this both ways in different times in the history of our country. It also really bothers me that the government no longer produces paper money, but has the Federal Reserve issue Federal Reserve Notes, rather than gold certificates, silver certificates, or United States Notes that were issued by the Federal Government. The reason this bothers me is that the Fed charges our government interest every time they want to increase the money supply; in short, the government makes a note to the Fed (known as a Treasury Bill) upon which the Fed issues more cash. I think it is dumb to pay interest to a bank in order to issue a government’s fiat currency that’s backed by, well, nothing, but we’ve been doing this for almost 100 years.
However, joe taxpayer out there has no reason to get into a snit because the Fed loaned ITS money to AIG. Its their damn business. Now, if Congress wanted to do so, it statutorily has the right to buy back all stock in the Fed system for a nominal amount. But, short of that, we as taxpayers don’t really have a say.
It is frankly amazing that our society is so completely in the dark, including the media and apparently our candidates for Presidency, about how all this stuff works. It is not a government bailout if the government doesn’t do it. The Federal Reserve is a bank and they can make loans. The only scary part is that the money in your wallet is FRN’s which is now only something like 86% backed by the full faith and credit of the United States – FRN’s are now backed but such things as obligations owed by Maiden Lane, LLC, (which was formed to purchase Bear Stearns) and now 80% of the stock of AIG.
If stuff in the Episcopal Church blows your mind, trying to learn about the Fed and how our monetary system works. See which one keeps you up at night thinking about it afterwords. Keep in mind that the Fed is a bank and is kinda just doing what banks do – make loans, make money. On the other hand, should we really let a bank be the sole issuer of legal tender in this country, and have the taxpayers pay them interest for doing so? This is what taxpayers should be ticked about, not the AIG loan. Getting whizzed about the AIG loan misses the whole big picture of the real mess we are in.
I’d really love it if someone out there would ask Obama and McCain whether either of them would abolish the Federal Reserve Bank. Their answers would certainly be a litmus test for my vote, and they don’t have to necessarily be pro or anti Federal Reserve. I would like to know if they really understand what is going on, especially since the economy is supposed to be the number one issue in this election.