Thursday, March 19, 2009

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 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

Get Over the Shock, Stop Them Now, 9/08

Why Americans Want Wall Street and the Banking Industry to Suffer, 9/08

Where Are They Getting The Money?, 03/08

Banks Will Pay Less to Borrow Money While Consumers Pay More, 2/08

Don't Just Get Mad, Ask Questions, 8/07

Other articles:

The Bush Bulldozer Strategy by Danny Schechter, 10/06

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