The Fed is privately owned. Its shareholders are private banks
La Reserva Federal es de propiedad privada. Sus accionistas son bancos privados
Ellen Brown
“Some people think that the Federal Reserve Banks are
United States Government institutions. They are private monopolies
which prey upon the people of these United States for the benefit of
themselves and their foreign customers; foreign and domestic speculators
and swindlers; and rich and predatory money lenders.”
– The Honorable Louis McFadden, Chairman of the House Banking and Currency Committee in the 1930s
"Algunas personas piensan que los Bancos de la Reserva
Federal son instituciones del Gobierno de los Estados Unidos. Son monopolios
privados que se aprovechan de personas de éste Estados Unidos para beneficio
propio y de sus clientes foráneos; de sus especuladores extranjeros y locales y
estafadores; y de sus ricos y depredadores prestamistas."
– El Honorable Louis McFadden, Presidente del Comité de Banca y
Moneda en los 1930s
The Federal Reserve (or Fed) has assumed sweeping new powers in the
last year. In an unprecedented move in March 2008, the New York Fed
advanced the funds for JPMorgan Chase Bank to buy investment bank Bear
Stearns for pennies on the dollar. The deal was particularly
controversial because Jamie Dimon, CEO of JPMorgan, sits on the board of
the New York Fed and participated in the secret weekend negotiations.1
In September 2008, the Federal Reserve did something even more
unprecedented, when it bought the world’s largest insurance company. The
Fed announced on September 16 that it was giving an $85 billion loan to
American International Group (AIG) for a nearly 80% stake in the
mega-insurer. The Associated Press called it a “government takeover,”
but this was no ordinary nationalization. Unlike the U.S. Treasury,
which took over Fannie Mae and Freddie Mac the week before, the Fed is not a government-owned agency. Also unprecedented was the way the deal was funded. The Associated Press reported:
“The Treasury Department, for the first time in its history,
said it would begin selling bonds for the Federal Reserve in an effort
to help the central bank deal with its unprecedented borrowing needs.”2
This is extraordinary. Why is the Treasury issuing U.S. government
bonds (or debt) to fund the Fed, which is itself supposedly “the lender
of last resort” created to fund the banks and the federal government?
Yahoo Finance reported on September 17:
“The Treasury is setting up a temporary
financing program at the Fed’s request. The program will auction
Treasury bills to raise cash for the Fed’s use. The initiative aims to
help the Fed manage its balance sheet following its efforts to enhance
its liquidity facilities over the previous few quarters.”
Normally, the Fed swaps green pieces of paper called Federal Reserve
Notes for pink pieces of paper called U.S. bonds (the federal
government’s I.O.U.s), in order to provide Congress with the dollars it
cannot raise through taxes. Now, it seems, the government is issuing
bonds, not for its own use, but for the use of the Fed! Perhaps the plan
is to swap them with the banks’ dodgy derivatives collateral directly,
without actually putting them up for sale to outside buyers. According
to Wikipedia (which translates Fedspeak into somewhat clearer terms than
the Fed’s own website):
“The Term Securities Lending Facility is a
28-day facility that will offer Treasury general collateral to the
Federal Reserve Bank of New York’s primary dealers in exchange for other
program-eligible collateral. It is intended to promote liquidity in the
financing markets for Treasury and other collateral and thus to foster
the functioning of financial markets more generally. . . . The resource
allows dealers to switch debt that is less liquid for U.S. government
securities that are easily tradable.”
“To switch debt that is less liquid for
U.S. government securities that are easily tradable” means that the
government gets the banks’ toxic derivative debt, and the banks get the
government’s triple-A securities. Unlike the risky derivative debt,
federal securities are considered “risk-free” for purposes of
determining capital requirements, allowing the banks to improve their
capital position so they can make new loans. (See E. Brown, “Bailout
Bedlam,” webofdebt.com/articles, October 2, 2008.)
In its latest power play, on October 3, 2008, the Fed acquired the
ability to pay interest to its member banks on the reserves the banks
maintain at the Fed. Reuters reported on October 3:
“The U.S. Federal Reserve gained a key
tactical tool from the $700 billion financial rescue package signed into
law on Friday that will help it channel funds into parched credit
markets. Tucked into the 451-page bill is a provision that lets the Fed
pay interest on the reserves banks are required to hold at the central
bank.”3
If the Fed’s money comes ultimately from the taxpayers, that means we
the taxpayers are paying interest to the banks on the banks’ own
reserves – reserves maintained for their own private profit. These
increasingly controversial encroachments on the public purse warrant a
closer look at the central banking scheme itself. Who owns the Federal
Reserve, who actually controls it, where does it get its money, and
whose interests is it serving?
Not Private and Not for Profit?
The Fed’s website insists that it is not a private corporation, is not operated for profit, and is not
funded by Congress. But is that true? The Federal Reserve was set up in
1913 as a “lender of last resort” to backstop bank runs, following a
particularly bad bank panic in 1907. The Fed’s mandate was then and
continues to be to keep the private banking system intact; and that
means keeping intact the system’s most valuable asset, a monopoly on
creating the national money supply. Except for coins, every dollar in
circulation is now created privately as a debt to the Federal Reserve or
the banking system it heads.4 The Fed’s website attempts to gloss over
its role as chief defender and protector of this private banking club,
but let’s take a closer look. The website states:
* “The twelve regional Federal Reserve
Banks, which were established by Congress as the operating arms of the
nation’s central banking system, are organized much like private
corporations – possibly leading to some confusion about “ownership.” For
example, the Reserve Banks issue shares of stock to member banks.
However, owning Reserve Bank stock is quite different from owning stock
in a private company. The Reserve Banks are not operated for profit, and
ownership of a certain amount of stock is, by law, a condition of
membership in the System. The stock may not be sold, traded, or pledged
as security for a loan; dividends are, by law, 6 percent per year.”
* “[The Federal Reserve] is considered an
independent central bank because its decisions do not have to be
ratified by the President or anyone else in the executive or legislative
branch of government, it does not receive funding appropriated by
Congress, and the terms of the members of the Board of Governors span
multiple presidential and congressional terms.”
* “The Federal Reserve’s income is
derived primarily from the interest on U.S. government securities that
it has acquired through open market operations. . . . After paying its
expenses, the Federal Reserve turns the rest of its earnings over to the
U.S. Treasury.”5
So let’s review:
1. The Fed is privately owned.
Its shareholders are private banks. In fact, 100% of its shareholders
are private banks. None of its stock is owned by the government.
2. The fact that the Fed does not get “appropriations” from
Congress basically means that it gets its money from Congress without
congressional approval, by engaging in “open market operations.”
Here is how it works: When the government is short of funds, the
Treasury issues bonds and delivers them to bond dealers, which auction
them off. When the Fed wants to “expand the money supply” (create
money), it steps in and buys bonds from these dealers with newly-issued
dollars acquired by the Fed for the cost of writing them into an account
on a computer screen. These maneuvers are called “open market
operations” because the Fed buys the bonds on the “open market” from the
bond dealers. The bonds then become the “reserves” that the banking
establishment uses to back its loans. In another bit of sleight of hand
known as “fractional reserve” lending, the same reserves are lent many
times over, further expanding the money supply, generating interest for
the banks with each loan. It was this money-creating process that
prompted Wright Patman, Chairman of the House Banking and Currency
Committee in the 1960s, to call the Federal Reserve “a total
money-making machine.” He wrote:
“When the Federal Reserve writes a check for a government bond it does exactly what any bank does, it creates money, it created money purely and simply by writing a check.”
3. The Fed generates profits for its shareholders.
The interest on bonds acquired with its newly-issued Federal Reserve
Notes pays the Fed’s operating expenses plus a guaranteed 6% return to
its banker shareholders. A mere 6% a year may not be considered a profit
in the world of Wall Street high finance, but most businesses that
manage to cover all their expenses and give their shareholders a
guaranteed 6% return are considered “for profit” corporations.
In addition to this guaranteed 6%, the banks will now be getting
interest from the taxpayers on their “reserves.” The basic reserve
requirement set by the Federal Reserve is 10%. The website of the
Federal Reserve Bank of New York explains that as money is redeposited
and relent throughout the banking system, this 10% held in “reserve” can
be fanned into ten times that sum in loans; that is, $10,000 in
reserves becomes $100,000 in loans. Federal Reserve Statistical Release
H.8 puts the total “loans and leases in bank credit” as of September 24,
2008 at $7,049 billion. Ten percent of that is $700 billion. That means
we the taxpayers will be paying interest to the banks on at least $700
billion annually – this so that the banks can retain the reserves to
accumulate interest on ten times that sum in loans.
The banks earn these returns from the taxpayers for the privilege of
having the banks’ interests protected by an all-powerful independent
private central bank, even when those interests may be opposed to the
taxpayers’ — for example, when the banks use their special status as
private money creators to fund speculative derivative schemes that
threaten to collapse the U.S. economy. Among other special benefits,
banks and other financial institutions (but not other corporations) can
borrow at the low Fed funds rate of about 2%. They can then turn around
and put this money into 30-year Treasury bonds at 4.5%, earning an
immediate 2.5% from the taxpayers, just by virtue of their position as
favored banks. A long list of banks (but not other corporations) is also
now protected from the short selling that can crash the price of other
stocks.
Time to Change the Statute?
According to the Fed’s website, the control Congress has over the Federal Reserve is limited to this:
“[T]he Federal Reserve is subject to
oversight by Congress, which periodically reviews its activities and can
alter its responsibilities by statute.”
As we know from watching the business news, “oversight” basically
means that Congress gets to see the results when it’s over. The Fed
periodically reports to Congress, but the Fed doesn’t ask; it tells. The
only real leverage Congress has over the Fed is that it “can
alter its responsibilities by statute.” It is time for Congress to
exercise that leverage and make the Federal Reserve a truly federal
agency, acting by and for the people through their elected
representatives. If the Fed can demand AIG’s stock in return for an $85
billion loan to the mega-insurer, we can demand the Fed’s stock in
return for the trillion-or-so dollars we’ll be advancing to bail out the
private banking system from its follies.
If the Fed were actually a federal agency, the government could issue
U.S. legal tender directly, avoiding an unnecessary interest-bearing
debt to private middlemen who create the money out of thin air
themselves. Among other benefits to the taxpayers. a truly “federal”
Federal Reserve could lend the full faith and credit of the United
States to state and local governments interest-free, cutting the cost of
infrastructure in half, restoring the thriving local economies of
earlier decades.
