October 7, 2008
from WebOfDebt Website
is Privately Owned
and Its Shareholders
are Private Banks.
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.
"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," 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:
So let's review:
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.