When the FED returns it's profits to the Treasury, what does the Treasury do with it?

Economics Economics Questions
, , ,
1

I know that the FED pays dividends to it’s shareholders (banks) 6%.

Question #1: Is it 6% per shareholder or do all the shareholders split that 6%?

Question #2: Does “Profit” pertain only to the money the FED makes on interest - or also the money it “created” to buy the government securities(treasury bills, bonds) in the first place?

Question #3: When the FED returns the rest of it’s profits to the Treasury(earned by charging interest on things like government securities) - what happens to that money? Is it spent in the Federal Budget? Is it re-paid to the FED to pay down debt (or buying back securities and interest it owes to the FED)?

Thanks guys!

2

What actually happens to the income only Bernanke knows. They are not audited. I doubt that they really return anything to the Treasury. The Treasury may count Federal Reserve income in its balance sheet, but that is different from actually giving it to the Treasury.

3

So is it true nobody knows except Ben Bernanke? Hard to believe but I suppose this is why we need to Audit them?

4

The GOA audits the FED.

5

Who is the GOA? And would they be able to tell us the answers to

Question #1 #2 and #3?

6

That would be Government Accountability Office. It seems that the Audit the Fed bill passed.

7

Is that actually true? I was under the impression it had failed:

http://www.ronpaul.com/2010-07-01/audit-the-fed-fails-229-198/

8

Ok. I was thinking of the HFS vote.

9

Ah. So then they can’t audit the FED. Does anyone know of a place where I could find information that might lead to the answers to my questions aobe?

10

My response comes from reading the Federal Reserve Act:

http://www.federalreserve.gov/aboutthefed/fract.htm

Every member bank is required to purchase shares (of $100 each) of a Federal Reserve bank in its respective district.

The member bank must subscribe (purchase) an amount equal to “6 per centum of the [member bank’s] paid-up capital stock and surplus”, no more or less.

Presumably, this “capital stock and surplus” is derived from the equity portion of a member bank’s balance sheet.

If a member bank’s own capital stock reduces, or its Fed shares exceeds the mandatory amount, it must surrender some of its Fed shares back, to bring it back down to 6% of its capital stock and surplus.

The Fed bank pays a member bank an annual dividend of 6%, based on the amount of shares the member bank owns.

For example, if a member bank owns 1,000,000 shares at $100 each, for a total of $100,000,000, the annual dividend at 6% would be $6,000,000.

Net earnings are derived from the income of the assets owned by the Fed. The Federal Reserve Notes (the money created) are receipts for assets the Fed purchases, currently irredeemable, unless the Fed sells the asset to somebody.

These receipts are held by the public or the government.

Net earnings remaining after the dividends are paid, must be held in the Fed’s “surplus account.”

The Fed as a matter of practice, maintains the surplus account equal to the “paid-in capital account”, i.e. the capital contributed by the member banks to the Fed for purchase of the shares.

According to the Fed, the surplus account acts as cushion in the event the Fed experiences losses greater than its undistributed earnings, such as losses from foreign currency it holds when the dollars appreciates, Treasury securities it may sell below par value, losses from the discount window, etc.

Net earnings, beyond what is considered necessary to maintain the surplus account, can at the discretion of the Secretary of the Treasury be transferred to the Treasury, and be used only for these two purposes exclusively:

  1. “supplement the gold reserve held against outstanding United States notes”
  2. “shall be applied to the reduction of the outstanding bonded indebtedness of the United States”

Here is a press release from the Fed about its net earnings:

http://www.federalreserve.gov/newsevents/press/other/20100112a.htm

Income earned by the Fed is exempt from Federal, State, and local taxes, with the exception of taxes upon its real estate. Not sure if a municipality can actually tax a Federal Reserve property, but it would be interesting if a local entity tried.

11

to Q#3 The FED doesnt earn interest on Treasury money. The coupon value is all rolled over (That is principle + Interest). The treasury never expects to pay back the money the fed buys, (absent some sort of policy shift.)

“Sorry, but our own monetary system has the same feature. When the Treasury securities held by the Fed mature — so that the Treasury has to pay back the face value in principal — the Fed rolls over the debt. Over time, the nominal market value of the Fed’s holdings of Treasury debt continually grows. Barring a sudden reversal in this policy, the Treasury knows that it will never have to pay off this debt. For all practical purposes, any Treasury debt ultimately finding its way onto the Fed’s balance sheet is economically equivalent to our monarch running the printing press to pay his bills.”

12

According to this wikipedia article on the 2010 Federal budget, the government spent $164 billion on interest on the national debt.

Wouldn’t that include debt owed to the FED?

13

It would. As Murphy’s article, courtesy of strat2131, says, the Fed makes the federal debt much easier to bear.

Acccording to its report (p.173), in fiscal year 2008 the Federal Reserve distributed to the US Treasury some $31.7 billion of its net earnings.

14

So if I’m following correctly, in simple terms and in order:

  • The Fed creates money and loans it to the government (through bonds etc. - a loan nonetheless)

  • The government spends that money into the economy

  • The government (treasury) collects taxes from the people and pays that debt back to the FED (in full or in part)

  • The FED Pays 6% dividends of the money the government gave it to the banks

  • The FED then returns whatever is left over to the Treasury as it’s profits

  • The government (treasury) then gives that money back to the FED to pay down more debt

Repeat the last 3 steps indefinitely untill all FED profits are paid out as dividends to banks?

All of this would:

A) Create a lot of inflation - especially considering fractional reserve lending
B) Make Banks the owners of all new money loaned to the government (when the interest is paid)

I must be missing something. This is too weird.

15

No. If the Fed sells a Treasury security to any private entity, then the private entity gets the government IOU, and the Fed cancels out the corresponding Federal Reserve Notes to balance out its own balance sheet.

In other words, the Fed through Open Market Operations engages in monetary contraction.

If the Fed sells a Treasury security to the Treasury department, then the Treasury gets the government IOU and cancels it, and the Fed cancels out the corresponding Federal Reserve Notes.

But in practice the Treasury can issue more Treasury securities to offset the canceled IOU’s.

16

So if the FED cancels the money when it sells securities there would be no inflation correct? I was unable to find information backing that up - do you have a link or a reference for that?

At the same time, what if the FED can’t find any buyers for the IOUs? What if they give more new money to the Treasury than general people are willing to buy? Would those 3 steps then continue to loop until the FED found a buyer for the IOU?

Lets assume that every time the FED buys an IOU from the Treasury that it is able to sell it and cancel the money it makes from that security. If that’s the case there would be no inflation (aside from fractional reserve lending) - and the government wouldn’t be able to print its own money like the a Monarchy as was previously stated.

So if that is the case - why end the FED? Thats a perfect way to take money from Rich people willing to risk their money - and allow the government to use it for things they feel are necessary. Like the bailout for example. It wouldn’t be the taxpayers who pay - but rather the people who bought the securities from the FED. Correct?

17

So if the FED cancels the money when it sells securities there would be no inflation correct? I was unable to find information backing that up - do you have a link or a reference for that?

If the Fed buys a treasury (govt security) and then straight away sells it and destroys then destroys the cash, yes it would have no implication on inflation. But why buy it in the first place if your just going to turn around and sell it? In reality, the FED buys treasuries and never sells them, they just hold onto them forever and their balance sheet slowly grows.

At the same time, what if the FED can’t find any buyers for the IOUs? What if they give more new money to the Treasury than general people are willing to buy? Would those 3 steps then continue to loop until the FED found a buyer for the IOU?

There are buyers for the IOU’s at some price. I doubt if the FED goes to sell a treasury next tuesdays, there wont be any offers. Thats like being at an auction and there are no people willing to buy a house in malibu for 1$. The fed can always sell its treasuries, just not at the price they feel comfortable with. There isnt a fixed amount of buyers, as the price for the security drops (yields grow) buyers will be induced into the market.

So if that is the case - why end the FED? Thats a perfect way to take money from Rich people willing to risk their money - and allow the government to use it for things they feel are necessary. Like the bailout for example. It wouldn’t be the taxpayers who pay - but rather the people who bought the securities from the FED. Correct?

So many issues with this sentence. Why is taking money from the Rich good? God forbid what if the government uses money on things that arent in the best interest of the people it serves? The new treasury holders arent paying the price for the bailout (talking about TARP not Maiden Lane), they are just lenders, where by tax payers will pay them back at a later date with interest.

Dont confuse government policy intentions, the official line was - “Wall Street” was going to go broke, that would “freeze credit markets” which would hurt mainstreet who couldnt get loans to pay off its workers. Workers would then get fired which would hurt hard working American families.

In truth, its all garbage, very few businesses use loans to pay workers, workers are going to get fired anyway if the business they work for cant service a loan, they bailed out their friends, some of whom work on wall street, (no one I know on wall street got given government money.) and credit markets still contracted lending. Unemployment still passed their projections. and hard working families will pay for the bailout by diluting their savings, crippling their economy and taxing them hard sometime in the distant future.

18

I’m getting conflicting answers here.

Does the FED hold on to the securities or does it sell them? If it hold on to those securities wouldn’t it be true that:

  • The Fed creates money and loans it to the government (through bonds etc. - a loan nonetheless)

  • The government spends that money into the economy

  • The government (treasury) collects taxes from the people and pays that debt back to the FED (in full or in part)

  • The FED Pays 6% dividends of the money the government gave it to the banks

  • The FED then returns whatever is left over to the Treasury as it’s profits

  • The government (treasury) then gives that money back to the FED to pay down more debt

Repeat the last 3 steps indefinitely untill all FED profits are paid out as dividends to banks?

All of this would:

A) Create a lot of inflation - especially considering fractional reserve lending
B) Make Banks the owners of all new money loaned to the government (when the interest is paid)

However if the FED sold all of its securities as soon as it bought them it wouldn’t create any inflation. But the real problem is that the Treasury can go into debt then isn’t it? The FED is only a problem if it holds on to the securities indefinitely.

So then should we be raising awareness about the FED holding onto securities? Is that the root cause of the problem?

19

Earlier, strat2131 already answered some of your questions, but I will elaborate.

If the Fed sells securities through Open Market Operations, then there would be a monetary contraction of the base money supply, and in general would be deflationary, but this does not happen very often.

In reality, the Fed increases its balance sheet assets (Treasury securities) and corresponding liabilities (Federal Reserve Notes) over time, and thus in general is inflationary.

Here is a link about Open Market Operations:

http://en.wikipedia.org/wiki/Open_market_operations

Here is my explanation about how this works:

[url]Question about open market operations - #4 by Think_Blue]

Then bond prices would fall, and bond yields would rise, until enough buyers are willing to buy.

Let me understand this. The Fed buys a Treasury security directly from the Treasury, and sells it on the open market? Then yes, there would be no increase to the base money supply.

But the Fed usually buys more securities then it sells, so it would rarely reduce its balance sheet assets.

I don’t understand your question.

20

No. The Treasury can buy the Treasury securities on the open market, with the net earning from the Fed. But in reality, the Treasury can issue and sell more securities, than it can buy and cancel, so the Federal debt can still increase over time.

However, consider this. From an accounting perspective, the Treasury does not need to buy a single Treasury security.

The Treasury only needs to calculate how many Treasury securities need to be issued and sold, minus the number that needs to be bought and canceled, and this net increase is how many securites the Treasury actually sells.