Just How Does The Fed Have Trillions of Dollars & the Government Doesn’t?
The Wall Street Journal is reporting that in an effort to stabilize the economy The Federal Reserve is saying it will “flood the financial system with an additional $1.2 trillion.”
That’s TRILLION with a T.
Washington Post Staff Reporter Neil Irwin reports:
“The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.
The decision by the Fed to buy government bonds and mortgage-related securities is designed to lower borrowing costs for home mortgages and other types of loans, thereby stimulating economic activity. The central bank, effectively, will print more money to pay for the purchases.
Combined with the billions already deployed by the Fed, the new money dwarfs even the biggest government bailouts of financial companies.”
You’re not kidding that it dwarfs other bailouts. So, I just have two questions:
- Where is The Federal Reserve getting this money? and,
- If The Fed has access to this much money why did Bernanke and Bush state that the world as we know it would come to an end if Congress didn’t rush to pass a $700 billion bill to bail out the banks?
I’m the first to admit that I’m no economic guru. I’m just a finance novice who is trying to maintain my household and make sense of the world around me. I really need someone to explain this. But be advised, momma didn’t raise no fool.
Here’s what I understand so far.
Wikipedia gives this description of the Federal Reserve System:
“The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system[1] that comprises (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional privately-owned Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous other private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils.The primary motivation for creating the Federal Reserve System was to address
banking panics.[13] Other purposes are stated in the Federal Reserve Act, such as “to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”[14]“
And according to the site FederalReserve.gov this is how the Fed is funded :
“The Federal Reserve’s income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions (the rate on which is the so-called discount rate). After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.”
So if the Federal Reserve turns all of its earnings, minus operating expenses, over to the U.S Treasury, how does the Fed now have trillions of dollars to “flood the banking system”?
To recap, The Federal Reserve is a “quasi-public”/private agency that was created to address banking panics and has trillions of dollars at its disposal but couldn’t prevent the current economic crisis unless Congress ponied up $700B of TARP money for the banks.
??????
Oh, I do have one last question.
Is it sheer coincidence that the Fed made this announcement while the US public is totally engrossed by the AIG bonus debacle?
Related posts:
The Narcoleptic Public Consciousness of America, 2/09
Other articles:
Comments
Comment from Pamela Lyn
Time: March 20, 2009, 9:38 pm
Bobbie,
Thank you so much for explaining this and please don’t apologize for the long explanation. We need more of them. This economic crisis cannot be summed up in sound bites. Important issues never can or should be.
This Sunday, March 22 I’ll be joining Political Voices of Women Contributing Editor, and editor of What Tami Said, Tami Winfrey Harris in a discussion on the economy at 4 p.m. EDT.
http://www.blogtalkradio.com/What-Tami-Said/2009/03/22/The-Best-of-What-Tami-Said
I recall learning in high school economics that there was nothing tangible, like the mythical gold in Fort Knox, to back our currency. I also recall being taught that FDR’s “New Deal” combined with WWII war spending brought the nation out of The Great Depression. But now I’m hearing some economists, pundits and elected officials claiming that what the New Deal did not work. And, since we’re currently in two wars, I suspect that we can’t count on war spending to save us. It’s all mind-boggling.
I’m not sure that I will ever fully understand the economy, how it is supposed to work and how it is being manipulated. But I promise you, that I intend to spend the rest of my life paying much, much closer attention as well as urging others to do the same.
For more information on this event go to:
http://whattamisaid.blogspot.com/2009/03/as-long-as-only-canaries-are-dying-was.html
Comment from Bobbie Wood
Time: March 20, 2009, 10:02 pm
Pam, I really like your ‘canary’ post explaining the lead-up to the current meltdown on Tami’s blog!! I’m off to read part II…
Comment from wtfs1ut
Time: August 10, 2009, 1:28 am
watch the films Zeitgeist and Zeitgeist: Addendum. guarantee youll be given a VERY in depth tutorial on how the fed mysteriously funds our country
Comment from Bobbie Wood
Time: March 20, 2009, 6:33 pm
Hi Pamela,
I have struggled to understand the meaning behind the Federal Reserve and fractional reserve banking. I first learned about this in college macroeconomics and was really shocked that it isn’t taught in high school civics. It’s the crux of how big business and government work together. I’d always thought of business and government as distinct entities! No way. They go hand in hand. Here’ the easiest to understand explanation I’ve found lately (From http://mises.org/story/3355):
“Right now, when the Federal Reserve engages in “open-market operations,” Bernanke goes into the market and buys, say, $10 million worth of US Treasuries from a bond dealer. How does Bernanke pay for this? Why, he simply writes them a check written on the Federal Reserve.
When the bond dealer deposits the $10 million check, his bank credits his checking account with $10 million. Then the bank itself turns the check over to the Fed. Get ready, here’s the fun part: when the Fed receives a check — written on itself — from Acme Bank, the Fed processes the check and increases Acme’s checking balance with the Fed by $10 million. But there is no corresponding debit to any other checking balance! The total amount of member-bank reserves, held on deposit with the Fed, has magically increased by $10 million.
As everyone who didn’t skip the relevant college lecture will recall, the fractional-reserve nature of our banking system means that the injection of $10 million in new reserves will actually allow up to $100 million in new money to enter the economy.”
Sorry for the long reply, but this stuff is complicated!! Thanks for your post. More regular people need to understand this stuff.
Bobbie