A Word About The Financial Crisis – The Fed’s Money Is Not Tax Money

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.

You might be surprised at what you find if you click here, here, and here.

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.

4 Responses to “A Word About The Financial Crisis – The Fed’s Money Is Not Tax Money”

  1. 1 Bob Maxwell+ September 18, 2008 at 2:34 am

    Brad, it’s true that it’s not our taxes that provides the funding. However, it is the fees collected from the banks the Federal Reserve serves and they collect the $$$$ they us from their customers directly or indirectly.

    So, it is our $$,$$$,$$$.$$ that they charge us for the security they provifde that is used. For that security, I’m thankful. I am not thankful for the lack of controls being exercised by the SEC etc.

    Our IRA CD’s aren’t making much theses days. . .and they aren’t insured by the FDIC.

    I hope you enjoyed your birthday last weekend.

    Bob +

  2. 2 Ken Blackwell September 18, 2008 at 10:06 am

    Sorry Brad, I’m not buying it…

    The true test here is what happens if AIG defaults on the loans from the Fed? Clearly there is very high risk of that, so much so that normal commercial banks said no way.

    Assuming that they don’t default, then best case is that the money supply is $85b less. Tight money supply is what is causing the mess that we are in, so this bailout is making matters worse.

    If they do default, then the Fed is forever out $85b and will need to replinish its vaults in order to keep the economy liquid. Where will it get the money? Taxpayers through printing of money at treasury. This will drive up the debt and cause rampant inflation.

    You are 100% correct about the mechanics, but this does hurt taxpayers in the end and that is what matters. And besides the actually dollars involved immediately, it sets a very bad precedent that bankers can take extrodinary risks and not worry about their downside because the fed will come to their rescue. Also, remember that the Fed is a regulatory body of banks and with AGI, is now bailing out an entity that it is not responsible for regulating. This is extremely bad policy.

  3. 3 John Delmore September 22, 2008 at 8:07 pm

    “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford

  4. 4 Craig Goodrich October 1, 2008 at 9:01 am

    If the Fed creates $700B out of thin air to fund the bailout — which is what it would do — the taxpayers will pay in the form of inflation over the next few years, as we’re now seeing inflation from the money the Fed pumped into the economy to keep the 90s booming (that money first bought high-tech stocks, then fled to housing, and is now buying milk).

    As always, we will pay now or we will pay later — but it’s WE who will wind up paying.

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