Everything You Ever (Or Never) Wanted to Know About the Fed

Central banks are weird animals. The US Federal Reserve is a no exception. In the UK they would call it a quango (quasi government) public entity. The Fed is owned by shareholders and is actually a private not government entity, but its management is appointed for 14-year terms by the president. Sounds like a heck of a system. Here is some more info.

Trivia about the Fed:
The Fed isn’t allowed to participate in lotteries

Not sure if that is on the selling or the buying-tickets end of the deal.

Earnings of the Fed can be used to top up the gold of the US treasury.

The net earnings derived by the United States from Federal reserve banks shall, in the discretion of the Secretary, be used to supplement the gold reserve held against outstanding United States notes, or shall be applied to the reduction of the outstanding bonded indebtedness of the United States under regulations to be prescribed by the Secretary of the Treasury.

The Fed is exempt from all taxes except real estate
Federal reserve banks, including the capital stock and surplus therein, and the income derived therefrom shall be exempt from Federal, State, and local taxation, except taxes upon real estate.

The Fed is still allowed to produce $10,000 notes.
Let's hope we don’t see those floating around. If you find yourself buying cigarettes and beer with a $10k note, things have probably slipped a bit and we are on TARP version 30.1.

TIP: They discontinued the $100,000 note in 1945, so don't take one as change, it may be fake.

Foreign securities aren’t allowed to be pledged as security
No obligations of any foreign government, individual, partnership, association, or corporation organized under the laws thereof shall be eligible as collateral security for advances under this section.

The federal reserve can create its own “police force”

Law enforcement officers designated or authorized by the Board or a reserve bank are authorized while on duty to carry firearms and make arrests without warrants for any offense against the United States committed in their presence, or for any felony cognizable under the laws of the United States committed or being committed within the buildings and grounds of the Board or a reserve bank if they have reasonable grounds to believe that the person to be arrested has committed or is committing such a felony.

Fed meetings schedules are determined by whether it is an odd or even year.
1. before the Committee on Banking and Financial Services of the House of Representatives on or about February 20 of even numbered calendar years and on or about July 20 of odd numbered calendar years;
2. before the Committee on Banking, Housing, and Urban Affairs of the Senate on or about July 20 of even numbered calendar years and on or about February 20 of odd numbered calendar years.

The Fed uses a rating system known as CAMELs which ranks banks from 1-5 for soundness.
You don’t want a lot of 5-camel banks. In a very interesting approach to game theory which I agree with, the CAMEL rating system and ranks for banks aren’t published. One hopes this prevents gaming of the system and reporting. This lack of disclosure is based in my own opinion on an understanding of the nature of behavioral dynamics and rules systems. To sum up, people always try to get ahead and when it comes to risk that can be collectively very bad.

I won't go into details about why the ratings secrecy is important, but for those of you who know the ratings agency games and how securitization really worked, you will get it.

Fed ownership is a bit circular these days.

The Fed is owned by shareholders. It is generally assumed these shareholders are major banks. The Fed has been bailing out the major banks. I will leave it up to you, gentle reader, to interpret the implications of the associated megaponz diagram.

The Fed has a kids section.

In an example of inflation for kids using babysitting as an example, the Fed suggested that if inflation eats into your popcorn money you should ask your neighbor for a raise. No advocates of eating less popcorn. Wonder why we had a savings problem...

The Wikipedia entry for the Fed
History of central banking in the US.

Comments

[Tradememe:]

So, the Fed is owned by the major banks. And when they got into trouble, the Fed prints more money to bail them out. Everything is now clear.

Mar 13 11:53 PM

[Aristophanes:]

The author wrote:

"If you find yourself buying cigarettes and beer with a $10k note, things have probably slipped a bit……"

A daily $10k beer and cigarettes run and you'll look like Keith Richards.

That's slippage.

Mar 14 12:45 AM

[BxCapricorn:]

CAMEL is similar to bankrate.com's safe and sound rating, so I suggest anyone wondering how safe their credit union or bank is, visit the site and query their bank.

You could also personally use Dick Bove's recipe, which I'm sure you can google and find on the Internet. It does take a lot of time and effort though, and did not seem to help Mr. Bove understand the woes of the banking sector in 2007.

Mar 14 09:33 AM

[pacman1947:]

Nick,
When I was a boy, I heard a popular AM radio commercial where a boy, around my age, came through the screen door shouting, "Grandpa, could I have five bucks for an ice cream cone?" The commentator then came on to say that inflation raises the cost of everything, so save your money with us. It was a Riggs Bank commercial.

It was hilariously funny when I first heard it. I was 10. It was 1957.

Riggs no longer exists. It's over five bucks for a cone today.

Inflation is the cost of Fed operations. Enjoy it. A cone will cost your grandson one of those $10k notes for his grandson.

Mar 14 09:55 AM

[yellowhoard:]

Gee, how can I buy a few shares of the Fed? Such a great business model. It's like printing money!

Mar 14 10:24 AM

[morph366:]

Re Yellowhoard

I wouldn't buy shares in the Fed just yet - better to wait until after the securitization

Mar 14 10:32 AM

[PastTense:]

"Central banks are weird animals. The US Federal Reserve is a no exception"

No, the Fed is the exception--the other central banks are clearly parts of their respective governments.

I think the current mess is significantly due to its weird private-public structure. For example there is a general consensus on SA that Greenspan's easy money policy was a major cause of the recent bubble--which is in the process of collapsing. Why did Greenspan continue with this easy money policy? Because it increased bank profits--who are the shareholders of the Fed.

Mar 14 12:24 PM

[ussmls7:]

Here some more info about the Fed,read & weep!
www.contrahour.com/con.... A must read for every one.

Mar 14 02:44 PM

[hopschoko:]

I'm disappointed with the lack of articles on here about why we should nationalize the Fed.

Mar 14 06:19 PM

[marabout:]

The little video is interesting but misses the most important.
Money as debt by Paul Grignon is certainly the most educative documentary about the true nature of the FED and the system. video.google.com/video...
Money and mechanics published by the fed is also interesting: www.truthsetsusfree.co...

and Zeitgeist addendum ; is certainly another view which complete about everything

now www.webofdebt.com/ is quite critical and interesting about solution and relativemoney.wordpres.../ has an interesting approach to the Fed future and evolution of the monetary system

Mar 14 07:19 PM

[marabout:]

sorry .. missed Zeitgeist addendum link. here we go
video.google.com/video...

Mar 14 07:21 PM

[fireball:]

to my knowledge the fed has never submitted to an audit. is that correct? it appears to be the ultimate scam to eventually claim all real assets through expansion and contraction of money supplies just as jefferson warned.
google devvy kidd and her booklet "why a bankrupt america"
for a pretty good analysis of this wealth sucking scheme.

Mar 15 11:17 AM

[Ray Lopez:]

We don't need a Fed anymore. Look at the data that suggests growth in the 19th century, before the Fed, was nearly as high as the 20th. Look at the fact boom-and-bust cycles in the 19th century, before the Fed, were resolved quickly, unlike the Japan-style decades long malaise that the US seems to be suffering after the year 2000. Finally, consider that academics like George Selgin point out free banking is superior to a Fed. With free banking, you can still have fiat (paper) money, but each bank is independently judging how much to inflate / decrease the money supply. The collecting judgement of thousands of independent bankers is better than the judgment of a single government bureaucrat with near life tenure (e.g. Alan Greenspan).

Mar 15 11:59 AM

[timwalsh300:]

You really think it's a wise idea to give politicians who have no background in either economics or finance (Pelosi, Obama, etc.) the ability to both PRINT and SPEND money?

Personally, I'm quite thankful for the separation of powers that our apolitical Federal Reserve system provides.

On Mar 14 06:19 PM hopschoko wrote:

> I'm disappointed with the lack of articles on here about why we should
> nationalize the Fed.

Mar 15 04:52 PM

[timwalsh300:]

I'm sorry to inform you that you have been fooled by sleight-of-hand and logical fallacies.

There is no debt virus/trap/spiral. There is no need to borrow more money to pay back the interest on previously borrowed money.

When a bank loans money, the borrower spends the money into circulation. The borrower then receives his wages out of the money in circulation, and makes a payment (some principle + some interest) to the bank. The payment on the principle reduces the loan balance, BUT THE BANK SPENDS THE INTEREST PAYMENT BACK INTO CIRCULATION. They pay their bills, pay the wages of their employees, divide profits among shareholders, etc. All the money goes back into circulation. That's what money is for. From this, the borrower receives his next wages and makes his next payment. His final payment will be all principle and no interest, and will eliminate the remaining balance of the loan and as well as all the bank credit from that loan that was ever in circulation.

Hopefully you can sleep easier at night now.

On Mar 14 07:19 PM marabout wrote:

> The little video is interesting but misses the most important.<br/>M...
> as debt by Paul Grignon is certainly the most educative documentary
> about the true nature of the FED and the system. video.google.com/video...;ei=Rty7SfDlB4L8rgL764...
>
> Money and mechanics published by the fed is also interesting: www.truthsetsusfree.co...
>
>
> and Zeitgeist addendum ; is certainly another view which complete
> about everything
>
> now www.webofdebt.com/ is quite critical and interesting
> about solution and relativemoney.wordpres.../ has an interesting
> approach to the Fed future and evolution of the monetary system

Mar 15 05:06 PM

[jeffc:]

These are my questions on the Fed if anyone can be so kinds as to answer.
1. If the Fed pays back profits to decrease the national debt. Than in the case where it lends $1 million to the US government and the government pays back $1 million plus interest (from taxes), are the FED profits from the interest or profits include interest and principal (that was created out of nothing or at least has some reserve ratio assosiated with it). If profits are only from the interest than is the capital (that is created out of nothing) an ill gotten gain?

2. What reserve ratio does the Fed itself use when loaning to the US government. 0%, 10% or 100%.

3. If the US defaults doesn't that mean the Fed is left holding the debt?

4. Given that world has advanced from money supply being set by only the number of dollars in print and the reserve ratio of the banks to one in which the derivatives market, mortgage market, credit cards, homeowners who monetized/cash out their home equity, money market funds that effectively lend out money deposits and other sources I can't think of, doesn't this mean thhe Fed (or some new organization) needs to greater powers over these groups in addition to the bank to control money supply. Alternatively this can be a great opportunity to modernize the financial regulatory and money system.

Mar 15 10:58 PM

[timwalsh300:]

Jeff, this is my understanding...

1. The Federal Reserve cannot and does not lend money directly to the Treasury. This is called "debt monetization" and it is a myth. The hands of the Federal Reserve are bound because they need to maintain the target Fed Funds rate. If they were to buy US Treasury notes directly then the Fed Funds rate would fall and they would have to immediately sell the notes to the public to bring the rate back in line.

2. Again, the Federal Reserve cannot and does not lend money directly to the Treasury. This question relies on a false premise.

3. In the case of a US default, the Federal Reserve would only be left holding the debt that it had previously purchased from the public in support of the Fed Funds rate. This amount of debt is quite small compared to the number of Treasury notes still held by the public (something $800 billion vs. $6 trillion).

4. I think this is what we are seeing now with the Fed adding other things to its balance sheet besides just Treasury notes (i.e. mortgage debt, shares of banks, etc).

Mar 16 01:17 PM