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The Fed

The Federal Reserve

Although the Fed is charged with regulating the U.S. Banking system and establishing national financial policies for the U.S. Government, The U.S. Government does not own any shares in the Federal Reserve System or its component federally chartered banks. The U.S. Treasury receives all of the system’s annual profits after a statutory dividend of 6% on their capital investment is paid to member banks and a capital account surplus is maintained. According to the Fed audit just released to the public, Fed’s profits for the year were approximately 97.3 Billion Dollars.

In the process of unraveling the Fed, we got involved in some lively discussions about the relationship between the Treasury and the Fed. Precisely what is that relationship? According to Chris Cook the Fed is an agent of the Treasury when it lends money into existance at the request of the Treasury.  “Taxpayers’ money” has in truth never been anywhere near a tax-payer. This myth of tax and spend arises out of credit creation by the central bank. The myth of fractional reserve banking arises out of credit creation by private banks.

Comments by Chris Cook: (from FT Alphaville)

The tax and spend myth is that “tax-payers’ money” is first collected by the Fed and then spent, or lent.

Bernanke blew that one away when he told the committee that taxpayers’ money was not involved when the Fed was busy easing quantitatively. The Fed created 1.6 trillion somethings, which banks accepted, either for their own account or a customer’s account, in exchange for the Treasury Bills they owned, and these somethings were, and still are, deposited with the Federal Reserve Bank as a custodian of … “reserves”.

——

Bernanke confirmed the staggeringly simple reality that not a single taxpayers’ dollar is actually spent or lent when the Fed follows the Treasury’s instructions to credit any account, anywhere, for anything. This is because the Fed is creating – as an agent on behalf of the Treasury – an exact “look-alike” of a Treasury IOU or promissory note. ie the Fed is simply pledging the Treasury’s credit by creating tax credits…

The key point is that the Fed may  be the Treasury’s fiscal agent in
creating and issuing dollars; and it may be the Treasury’s banker
counter-party; but it cannot be BOTH in relation to the same
transactions of credit creation.

The Doublethink is that we currently believe both of these two
mutually exclusive descriptions of the Fed’s role.

The outcome is that Fed credit is not in fact a claim over value – as
is a Treasury bill of credit (eg a greenback) – it is a claim over
Treasury debt.  ie it is a claim over a claim over value.

The effect of this accounting misrepresentation has been an
ideological distortion of the nature of money, on the one hand, and
the almost complete detachment of mainstream economics from reality,
on the other.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.

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