FED came into existance in 1913 for the purpose of controlling the money supply by lending to banks at higher or lower interest rates. I just read from wikipedia that this interest after expenses goes to the treasury.
I think this interest must be a LOT. What does the treasury do with this amount?
Case a) Gives it to some part of the govt.
Well, that's that.
Case b) Nothing
If this is the case, then over time, the entire country would be indebted to the FED due to compound interest. Because FED will be like this rich benefactor who has deep pockets and never spends a dime. The interest will act as a big drain on the money supply atleast on paper. This can always be compensated by more loans, but that new money registers as more loans affecting the debt situtation.
So is it case a or b? Is my conclusion correct?
Think Blue:The member bank does receive a 6% annual dividend on the stock it owns from the Fed regional bank
You guys are wasting your time with all this conspiracy stuff.
The Fed is effectively a government institution. The interest rate it charges is not really interest rate but just a tool (amongst a few other tools at its disposal), like a sort of a valve, used to control the rate of liquidity injected into the banking system.
The so called interest rate it charges banks on short term loans disappears right back to where it came from; air! when banks allegedly repay their loan.
The interest rate on any securities (such as government bonds) it owns eventually ends up in the coffers of the US treasury.
I agree that dividends and non-profit are a contradiction in terms. To resolve this contradiction, either the Fed admits it's really for-profit (with banks as the "investors"), or call the dividends something else (maybe "income sharing"?).
But the original question is "what does the Fed do with the interest it earns?". The Fed, after its expenses, distributes the remaining interest income to the member banks (at 6% annually on the capital stock) and the rest to the U.S. Treasury.
I always thought the majority of it went to the private banks in charge of the FED.
In States a fresh law is looked upon as a remedy for evil. Instead of themselves altering what is bad, people begin by demanding a law to alter it. ... In short, a law everywhere and for everything!
~Peter Kropotkin
All Fed profits go directly to the federal government. The member banks are required to own shares but are not permitted to sell their shares and do not receive any dividends.
DougM:All Fed profits go directly to the federal government. The member banks are required to own shares but are not permitted to sell their shares and do not receive any dividends.
Let me make a slight correction. The member bank does receive a 6% annual dividend on the stock it owns from the Fed regional bank.
Not exactly sure how a dividend can be construed as a "conspiracy", but here is the source straight from the Fed:
http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#5
Here is a Washington Post article on what the Fed does with all that interest income:
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html
DD5:The so called interest rate it charges banks on short term loans disappears right back to where it came from; air! when banks allegedly repay their loan.
And this exactly is my problem. If this is true (and I will consider it is for argument purposes. Whether it is actually true can be decided later), then what I am saying is, MORE money disappears (or is scheduled to disappear as debt) into THINAIR than actually comes out of it.
When money is created, it is _DEBT_. When the money disappears, it is LIQUIDITY or COLD HARD CASH. Not a loan from some one else. This is an imbalance.
Normally, moneysupply + loans_taken == bank_balance (in a very simplistic way)
But if interest disappears into thin air,
moneysupply + loans_taken >> bank_balance
For a monetary expansion mechanism, this is bad as it puts everyone in debt. If we stopped taking loans from THINAIR immediately, we will be paying compound interest to THINAIR for a long time and having having a significant reduction in money supply. Essentially, USA took a loan from THINAIR but only paid interest for 90 years until most of the money is gone but the loan principal remains. So now everyone is in debt to THINAIR. WTF?!!! :-)
Think Blue: ot exactly sure how a dividend can be construed as a "conspiracy", but here is the source straight from the Fed: http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#5
ot exactly sure how a dividend can be construed as a "conspiracy", but here is the source straight from the Fed:
And just below that:
"After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury."
The federal reserve system is not a for profit institution, so really, what's the point about mentioning dividends. These aren't dividends in any real sense of the term.
DD5:"After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury." The federal reserve system is not a for profit institution, so really, what's the point about mentioning dividends. These aren't dividends in any real sense of the term.
Then according to you, if those dividends are not really "dividends", then what would you call those payments made by the Fed regional banks to the member banks on the capital stock at 6% annually?
Think Blue:Then according to you, if those dividends are not really "dividends", then what would you call those payments made by the Fed regional banks to the member banks on the capital stock at 6% annually?
According to your own link, the federal reserve banks do not operate for profit. The stocks are not regular stocks. Read it again.
Don't ask what's the point of all this. There is no point. Probably to confuse everybody, and what a job they've done. The Fed is nothing but the US central bank.
Gautham Anil: But if interest disappears into thin air,
I'm sorry, what I meant is the principle of the loan. is what disappears. The interest is then either recycled into the next loan or it finds its way into the Treasury. It's one of the two. I'm quite sure it's just recycled in the case of short term loans to banks, which is why I said that the interest rate is basically a valve on the rate of flow of new money.
The member banks are part of the Federal Reserve system.
On the other hand, you can buy stock tomorrow for Citibank. Those are real stocks. And you won't get 6% from the Fed.
The Fed doesn't have to admit anything just like the US postal office doesn't have to admit anything. Besides, what is there to admit?
Think Blue, thank you for the clarification.
DD5, I think that you're failing to consider the federal funds target rate. The Fed uses two interest rates to execute monetary policy. One of these is the Fed discount rate, which is the rate that it charges member banks to borrow money from it. The Fed can directly set this rate but it is only for overnight loans from the "lender of last resort." There is a stigma attached to borrowing this money. Any bank that goes to the discount window is generally considered to be in trouble, much as if you went to your parents to borrow money.
The other, and more important, interest rate is the federal funds target rate. The federal funds rate is the lending rate that banks charge to other banks. The Fed does not directly set this rate. Instead, they influence it through their discount rate, open market operations, and reserve requirements.
I've already described the discount rate and we'll set reserve requirements aside for the time being. Open market operations involve the Fed buying securities from and selling them to several primary dealers. Traditionally, these securities have been short-term treasury bills and bonds (in recent years, they have expanded into mortgage-backed securities, shares of investment banks, and five and ten year treasury bonds). The banks have an option of lending to other banks or buying these securities. If the Fed buys these securities, they increase the price and, consequently, lower the yield. Banks usually lend more money at lower rates because they can get a higher return doing this than they can buying treasury securities. When the Fed buys these securities, it does so by creating money.
The net profit that the Fed earns from the interest on its investments (after the 6% dividends) is returned to the treasury. If the treasury used all of this money to pay off its bonds, there would be no net effect on the money supply. It almost never does this. Instead, it spends this money, thus allowing the increase in the money supply that the Fed created to work its way through the economy. The open market operations are among the Fed operations that can not be audited, although the Fed is very open about how the process works. The process is hidden only to the extent that it is too complex for the average Joe to comprehend. You'll have to decide if calling something that is hidden in plain sight a "conspiracy."
Thanks for the elaborate explanation here but I don't see what I failed to consider.