The Fed's Raging Conflict(s) of Interest
I'm not sure where to start with this so let's just jump right in and hope we get to the good part sooner or later, shall we? The point of all this (if you can't afford the two and a half minutes it will take you to scan the expletive-filled rant you're about to read below) is that the Fed is no longer independent (if one believes it ever was), nor is it in any position to dictate monetary policy since it has such an interest in the outcome. Funny, when it was just markets and dollars they bumbled it all they cared to but now that they've got $2 trillion on the line and unwashed masses to appease, it's all about ROI, bitches.
Chuck Butler via Daily Reckoning:
Last week, I carried on about the Fed making $52 billion last year, and wondered why this wasn’t as big a deal as Exxon/Mobil’s huge bonanza a couple of years ago. I mean, at least when Exxon/Mobil made billions, there were stockholders who benefited… Normal people – moms and pops, etc. When the Fed had the bonanza it handed it over to the Treasury, which some would think would go back to the taxpayers… Yeah, right…
But, I got to thinking this past weekend about the bonds the Fed is holding… No wonder they don’t want to see interest rates rise! For, if interest rates rise, their holdings would take on water, and… The Fed has stated that they intend to sell these bonds back to the markets some day… Well, try doing that when interest rates have risen on your bond holdings!
And… What happens if interest rates rise so high that the Fed starts taking on water, with negative interest rate spreads on the their holdings? Talk about cries to audit them then!
(h/t Jeff for the DR link)
The Fed "made" $52 billion last year and returned $46 billion (what the media mistakenly called Fed "profits") to the Treasury. Want to take a stab at what the Treasury will do with that money? How about pay down some interest and issue a shit ton more T-bills for the Fed to buy? Again, I like a good jerk off as much as the next girl but enough is enough.
What the media didn't really mention while they were getting worked into a lather over said Fed "profits", however, were Fed shareholders. Yes, shareholders. Do Fed shareholders get dividends for performance like that?
In February of 2009, the Fed was urging TBTF banks to put bailout money into loans, not dividends. Did they bitch at JP Morgan for still not following directions nearly a year later when it handed over a 6% return for JPM's chunk of Fed ownership? Add it up; each private bank that is legally required to own stock in the Fed as a condition of membership in the System got a 6% dividend before the Treasury got what was left over. I have never seen a comprehensive list of Fed stockholders (I imagine one exists somewhere, if you know where please let me know) but one can easily guess that every Fed-supervised bank falls under this rule and those number in the thousands.
That means Citigroup. Bank of America. JP Morgan. Wells Fargo. You get the point. They also got 6% each at the beginning of 2009, just months after taking billions in TARP money. If this sounds bizarre to you, good, it means you're paying attention.
And hey! It gets better (of course it does):
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.
Chuck is right, the Fed will now need to consider a return on investment above all else because it knows the second it starts bleeding cash (even if it bleeds it for a good reason, like draining funny money out of the system - the bloodletting of the financial crisis, as it were), the pitchforks hit the air and the unwashed masses start calling for the Fed's head on a plate again. But so long as they can dominate the headlines with crap like "Fed Makes a $46 billion profit!!", the sheep aren't out for blood and satiated until the next "earnings report". Go back to your lives now, nothing to see here...
In what other business would the company also be in charge of supervising the financial soundness of its own shareholders? Only in central banking I suppose.
I will let you in on a little secret: the Fed knows it cannot force banks to lend. In fact, the Fed is better off if banks don't because that means banks can keep putting their cheap money into T-bills, meaning the Fed doesn't have to. They've already got plenty and if they decide to raise rates without warning before they've unloaded a good amount of what they've built up in the last, oh, year or so, they're screwing themselves. As if anyone wants Treasurys anyway. Oh wait, "foreign central banks" LOL.
Isn't that a conflict of interest?
I could have my definitions wrong, it's happened before.