No Congress, The Federal Reserve Is Not A Piggy Bank

December 12, 2015—Congress recently passed a highway bill that raided the Federal Reserve’s surplus account to pay for more federal highway infrastructure. How is that possible considering that the Fed does not receive direct appropriations from Congress?

The Fed piggybankcharges member banks for services such as check clearing, but it receives the overwhelming majority of its earnings from the interest it receives on the Treasury debt and other securities it holds, securities which were purchased with money created out of thin air. The Fed’s earnings go to pay salaries and other expenses, with anything left over being turned over to the Treasury Department.

One of the Fed’s expenses is a contribution to its surplus account, which under the Board of Governors’ policy must be equal to the amount of capital paid in by the Fed’s member banks. The purpose of the surplus account is to provide a cushion in the event of any future losses, and it currently sits at a little over $29 billion. Recently, $19 billion of that share was ordered by Congress to be turned over to the Treasury Department’s general fund. That is problematic for a number of reasons.

First, there is a danger that Congress might begin to see the Fed as a piggy bank from which they can draw funds at any time.

With a $4.5 trillion Federal Reserve balance sheet and a Congress looking to increase spending without raising taxes, don’t be surprised to see enterprising legislators looking to shake the Fed down for every last penny they can get.

While this isn’t the first time the Fed surplus account has been raided, this is the largest transfer made, and now that the surplus account is capped at $10 billion, there should be more money coming the Treasury’s way from excess earnings in the future.

The real danger comes in the precedent this sets for future transfer demands.

A future Congress might decide to earmark a certain amount of the Fed’s annual excess earnings ($98.7 billion in 2014) towards transportation funds or some other multi-year spending projects. If the projected transfers fail to meet expectations, Congress will use that as an excuse to issue more debt for the Fed to purchase and receive interest payments on in order to boost earnings, and therefore excess earnings, back to the original projections. Thus the raids on the Fed’s assets end up becoming an incentive for government spending to get even more out of control.

Let’s not forget that the Fed’s excess earnings and surplus account aren’t some magic source of free money that’s out there for the taking.

Here’s how the process works:

The federal government spends more than it takes in, then it issues debt to pay for the excess spending. Banks buy that debt from the Treasury at auction, then sell it to the Federal Reserve, which pays for the debt with money created out of thin air.

The Fed then receives interest payments on that debt from Treasury, pays its expenses with that interest, deposits a small fraction into the surplus account, then gives the rest of the interest payments back to Treasury.

It’s like a massive money-laundering operation to conceal the fact that the federal government’s newly-created debt is being paid for by creating money out of thin air. At the end of the day, the government pays for its spending and receives a little bit of its interest payment back. As a result, the Fed ends up with more Treasury securities and more interest income to pay for its operations, and the banks have newly created money from the Fed to play around with, with all the problems that entails.

Finally, actions like this fund transfer gimmick also undermine the anti-Fed cause in Congress.

How can Congress ever get serious about cleaning up shop, eliminating the Federal Reserve System and returning to market-based money, if the Fed becomes another funding source for pork barrel spending?

The Fed has, from its earliest days, helped to fund government operations. That was a large motivator behind the creation of central banks. But raiding the Fed’s surplus account to finance higher government spending makes the Fed even more indispensable to Congress than it is today.

If Congress wants to get serious about Fed oversight, reform, or abolition, it needs to show some discipline, remove its hand from the cookie jar, and actually do something substantive to rein in the Fed.

Do you think Congress is sitting on its hands out of ignorance or willingness to play along? Share your thoughts!

This article was originally published here.
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