I know that the FED pays dividends to it's shareholders (banks) 6%.
Question #1: Is it 6% per shareholder or do all the shareholders split that 6%?
Question #2: Does "Profit" pertain only to the money the FED makes on interest - or also the money it "created" to buy the government securities(treasury bills, bonds) in the first place?
Question #3: When the FED returns the rest of it's profits to the Treasury(earned by charging interest on things like government securities) - what happens to that money? Is it spent in the Federal Budget? Is it re-paid to the FED to pay down debt (or buying back securities and interest it owes to the FED)?
Thanks guys!
What actually happens to the income only Bernanke knows. They are not audited. I doubt that they really return anything to the Treasury. The Treasury may count Federal Reserve income in its balance sheet, but that is different from actually giving it to the Treasury.
So is it true nobody knows except Ben Bernanke? Hard to believe but I suppose this is why we need to Audit them?
The GOA audits the FED.
Who is the GOA? And would they be able to tell us the answers to
Question #1 #2 and #3?
That would be Government Accountability Office. It seems that the Audit the Fed bill passed.
Is that actually true? I was under the impression it had failed:
http://www.ronpaul.com/2010-07-01/audit-the-fed-fails-229-198/
Ok. I was thinking of the HFS vote.
Ah. So then they can't audit the FED. Does anyone know of a place where I could find information that might lead to the answers to my questions aobe?
My response comes from reading the Federal Reserve Act:
http://www.federalreserve.gov/aboutthefed/fract.htm
philjohnston:Question #1: Is it 6% per shareholder or do all the shareholders split that 6%?
Every member bank is required to purchase shares (of $100 each) of a Federal Reserve bank in its respective district.
The member bank must subscribe (purchase) an amount equal to "6 per centum of the [member bank's] paid-up capital stock and surplus", no more or less.
Presumably, this "capital stock and surplus" is derived from the equity portion of a member bank's balance sheet.
If a member bank's own capital stock reduces, or its Fed shares exceeds the mandatory amount, it must surrender some of its Fed shares back, to bring it back down to 6% of its capital stock and surplus.
The Fed bank pays a member bank an annual dividend of 6%, based on the amount of shares the member bank owns.
For example, if a member bank owns 1,000,000 shares at $100 each, for a total of $100,000,000, the annual dividend at 6% would be $6,000,000.
philjohnston:Question #2: Does "Profit" pertain only to the money the FED makes on interest - or also the money it "created" to buy the government securities(treasury bills, bonds) in the first place?
Net earnings are derived from the income of the assets owned by the Fed. The Federal Reserve Notes (the money created) are receipts for assets the Fed purchases, currently irredeemable, unless the Fed sells the asset to somebody.
These receipts are held by the public or the government.
philjohnston:Question #3: When the FED returns the rest of it's profits to the Treasury(earned by charging interest on things like government securities) - what happens to that money? Is it spent in the Federal Budget? Is it re-paid to the FED to pay down debt (or buying back securities and interest it owes to the FED)?
Net earnings remaining after the dividends are paid, must be held in the Fed's "surplus account."
The Fed as a matter of practice, maintains the surplus account equal to the "paid-in capital account", i.e. the capital contributed by the member banks to the Fed for purchase of the shares.
According to the Fed, the surplus account acts as cushion in the event the Fed experiences losses greater than its undistributed earnings, such as losses from foreign currency it holds when the dollars appreciates, Treasury securities it may sell below par value, losses from the discount window, etc.
Net earnings, beyond what is considered necessary to maintain the surplus account, can at the discretion of the Secretary of the Treasury be transferred to the Treasury, and be used only for these two purposes exclusively:
Here is a press release from the Fed about its net earnings:
http://www.federalreserve.gov/newsevents/press/other/20100112a.htm
Income earned by the Fed is exempt from Federal, State, and local taxes, with the exception of taxes upon its real estate. Not sure if a municipality can actually tax a Federal Reserve property, but it would be interesting if a local entity tried.
to Q#3 The FED doesnt earn interest on Treasury money. The coupon value is all rolled over (That is principle + Interest). The treasury never expects to pay back the money the fed buys, (absent some sort of policy shift.)
"Sorry, but our own monetary system has the same feature. When the Treasury securities held by the Fed mature — so that the Treasury has to pay back the face value in principal — the Fed rolls over the debt. Over time, the nominal market value of the Fed's holdings of Treasury debt continually grows. Barring a sudden reversal in this policy, the Treasury knows that it will never have to pay off this debt. For all practical purposes, any Treasury debt ultimately finding its way onto the Fed's balance sheet is economically equivalent to our monarch running the printing press to pay his bills."
http://mises.org/daily/4029
According to this wikipedia article on the 2010 Federal budget, the government spent $164 billion on interest on the national debt.
http://en.wikipedia.org/wiki/2010_United_States_federal_budget
Wouldn't that include debt owed to the FED?
It would. As Murphy's article, courtesy of strat2131, says, the Fed makes the federal debt much easier to bear.
Acccording to its report (p.173), in fiscal year 2008 the Federal Reserve distributed to the US Treasury some $31.7 billion of its net earnings.
Mises Wiki | Economic Resources and Books (search engine)
So if I'm following correctly, in simple terms and in order:
- The Fed creates money and loans it to the government (through bonds etc. - a loan nonetheless) - The government spends that money into the economy - The government (treasury) collects taxes from the people and pays that debt back to the FED (in full or in part)
- The FED Pays 6% dividends of the money the government gave it to the banks - The FED then returns whatever is left over to the Treasury as it's profits - The government (treasury) then gives that money back to the FED to pay down more debt
Repeat the last 3 steps indefinitely untill all FED profits are paid out as dividends to banks?
All of this would:
A) Create a lot of inflation - especially considering fractional reserve lending B) Make Banks the owners of all new money loaned to the government (when the interest is paid)
I must be missing something. This is too weird.
philjohnston:- The FED Pays 6% dividends of the money the government gave it to the banks - The FED then returns whatever is left over to the Treasury as it's profits - The government (treasury) then gives that money back to the FED to pay down more debt Repeat the last 3 steps indefinitely untill all FED profits are paid out as dividends to banks?
No. If the Fed sells a Treasury security to any private entity, then the private entity gets the government IOU, and the Fed cancels out the corresponding Federal Reserve Notes to balance out its own balance sheet.
In other words, the Fed through Open Market Operations engages in monetary contraction.
If the Fed sells a Treasury security to the Treasury department, then the Treasury gets the government IOU and cancels it, and the Fed cancels out the corresponding Federal Reserve Notes.
But in practice the Treasury can issue more Treasury securities to offset the canceled IOU's.