Confession and WTF?

[Celebration]

Okay, in college my husband and I were good friends with someone who became a really high up economic dude in W administration. He has since quit that position. That is the confession part of this. I'll call him "dude." We never see him because his circle is very wide, he doesn't live anywhere near us, he has bookoodles of money from various great investments he has made etc. etc. This guy had a reputation of being smart and he has an Ivy League MBA. In fact, he was pretty scholarly.

Dude has no idea of my political leanings, but he happened to be in town and we actually went to a small dinner party with him. Probably 90% of the people there were Republicans. This was somewhat difficult for me. But I had some economic questions and thought he would be a good source for some answers.

Dude is very pro free market and has reservations about the Bear Stearns "bailout." Some people were even wondering about the legality of it. My question, "One thing I never got totally straight, Dude. Is it the Federal Reserve Balance sheet that is guaranteeing the Bear Stearns toxic paper, or is it the U.S. taxpayers?"

His answer was, "of course it is the taxpayers. The Federal Reserve belongs to the government."

I said, well, I understood it is a public/private partnership with a private ownership structure.

He looked at me in disbelief, in that he didn't believe what I was saying because, what I was saying was so ignorant and he never believed I was ignorant.

He repeated--this is our tax money because the Federal Reserve Board is ours. He said it controls our monetary policy. Well, of course it does, I said.

I had been instructed by my husband before this dinner to be polite, but I was not going to let it end there. I said, "I actually boned up before coming to dinner with you and checked the internet. The Federal Reserve Board is set up as a corporation in which the member banks hold shares--they can't sell the shares, but there are dividends and everything."

He said, well that might be the formal structure but basically we own it.

I had made my point so I just let that slide and we went on talking about something else.

WTF?

WTF?

After the dinner, my husband said he was proud of the way I handled it. I didn't want to embarrass Dude. Even my husband, whose political persuasions I don't exactly share said,

WTF? Even he knew that the Federal Reserve Board had private ownership. Of course I tell him that every other day to remind him, but even he, economic guru that he is not, had read it in a history book.

I cannot stress this to you enough--this guy was BIG POTATOES.

How can people be involved in making economic policy when they are uninformed about the ownership of the Federal Reserve Board? This is just so...............myopic...............so..............blinders. They just make assumptions, even about facts, and never challenge these assumptions.

I was in sort of a state of shock. Of course, I never got my question answered.

Little details like the ownership of an entity is just glossed over like it has no importance.

WTF?

[tbyg52]

1. WTF is that "they" gets the money and "we" pays the piper.... nt

[Celebration]

2. I'm still interested in how this works

Suppose the paper goes belly up? Then what happens? Does the Fed exchange it permanently for Treasury Bills? I realize that the Fed can make it up easily by "printing" money.

But this is very important. The Federal Reserve Board has its own balance sheet, and that balance sheet is not comingled with the balance sheet of the US government, or the US taxpayers.

If the taxpayers directly are responsible for the bailout, I would think it would be illegal without congressional approval.

Now, the Fed is encroaching on its own balance sheet with this guarantee.

Does anyone know the technicalities of this? I thought for sure that Dude would know this, and WTF he was even more clueless than I am.

[tbyg52]

4. I am interested in how it supposedly works as well

But I still think the end result is as Dude said, unfortunately for us peons.

[salvorhardin]

3. Likely the "dude" was just being polite in light of your ignorance

The Federal Reserve is not privately owned. You can keep making assertions to the contrary but that doesn't make your assertions true. From the Fed's FAQ:

The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent within the government."

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.
http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm

The member banks are privately owned but they are not without governmental oversight:

The regional Federal Reserve Banks are private owned, but they are controlled by the Board of Governors -- a federal agency whose members are appointed by the President and confirmed by the Senate. The Board sets monetary policy and the Federal Reserve Banks execute it. In addition, the Fed does not use any taxpayer money to fund its operations. While the Fed does collect interest on government bonds, the Treasury would have had to make such payment even if they Fed did not hold any bonds. Moreover, the Fed rebates a significant share of its net income to the Treasury each year, revenues the government would not have at all if the Fed owned no government bonds.
http://www.publiceye.org/conspire/flaherty/flaherty4.html

The myth that the Federal Reserve is a privately owned entity is part of wider far right-wing conspiracy theories whose popularity dates back to 1930s with Republican Congressman Louis T. McFadden's famous tirade against the Fed but whose origins lie in anti-semitism and the czarist hoax The Protocols of the Learned Elders of Zion. You would do well to read some of those same history books and stop repeating right-wing nonsense.

[crazymans economics]

5. Someone at the Fed thinks differently

http://www.conspiracyplanet.com/channel.cfm?channelid=114&contentid=579

[salvorhardin]

7. I would also suggest that you stop reading trash websites like Conspiracy Planet

Just a suggestion.

[Celebration]

6. The Federal Reserve Banks

Are owned by the member banks. I did make that clear at the dinner.

"The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year."

They issue dividends to stockholders. Get it?

The Federal Reserve Boards have separate balance sheet...........which consists of the consolidated statements of the twelve different banks.

Here it is.................

http://en.wikipedia.org/wiki/Federal_Reserve_System#Balance_sheet

"One of the keys to understanding the Federal Reserve is the Federal Reserve balance sheet (or balance statement). In accordance with Section 11 of the Federal Reserve Act, the Board of Governors of the Federal Reserve System publishes once each week the "Consolidated Statement of Condition of All Federal Reserve Banks" showing the condition of each Federal Reserve bank and a consolidated statement for all Federal Reserve banks."

Please note: There are shareholders in this system and they are the member banks--not the US taxpayers.

My question is VERY SIMPLE--Since it was the Fed that made the guarantees re: the Bear bonds IS IT THIS BALANCE SHEET THAT BACKS UP THE TOXIC BEAR STEARNS PAPER?

Can anyone answer that?

[abelenkpe]

10. Ask someone like Mish...or an official somewhere directly....

they might be able to give you an answer, but from your original post I would say that "dude' answered your question. In his view it is the taxpayers. Sorry he had to make you feel uniformed or ignorant in the process of giving you an answer. Very uncool. He might have been an important person in government but he sounds like an ass socially.
I think I read on Robert Reich's blog that it is the taxpayers and he was suggesting that since it is them taking the risks in this swap they should also benefit from any upside on the deal. But that currently they wouldn't be benefiting at all.

[Celebration]

11. Acch

I don't really trust my friend on this one since he seemed to have no idea that the Federal Reserve Banks have their own balance sheet (which I linked) that is completely separate from the US Government and the taxpayers, and owned by the member banks of the Federal Reserve system.

I don't think that Bernanke has the authority to guarantee bonds if that guarantee comes directly from the US taxpayers. Nor do I think the Treasury Department has that authority. That authority would solely come from the Congress. I just don't recall such a bill being passed by Congress. When I thought it was the Federal Reserve balance sheet backing the paper, I didn't have much problem with it. If it is us, it seems illegal--pure and simple.

I do remember it really ticked me off when the US taxpayers took stock in Chrysler for a loan, and then just turned it back over to the company once they got out of hot water.

But asking Mish might be a decent idea.

[DemReadingDU]

12. I am curious too. If you find the answer, please report back. n/t

[abelenkpe]

9. awesome user name....nt

[pansypoo53219]

8. the rite believes what they believe,

facts don't matter. which is why georgee and dickie will repeat again and again that saddam was involved with al qaeda. and there WERE WMD etc etc.

[Jim__]

13. According to an article in The Nation, it's ultimately the taxpayers.

Is This the Big One?:

We are now staring into the abyss. The Bear Stearns bailout has created a presumption of a safety net under any major stockbroker, in addition to any major bank. Rumors are that Lehman Brothers and Citigroup may be next. The Fed could handle a Lehman crash. But the collapse of Citigroup, the world's largest bank, would be catastrophic, bankrupting businesses, other banks and consumers and cutting off credit for state and local governments. And it could stretch the Fed to the limit of its resources.

There is a widespread assumption that there is no bottom to the pockets of the Federal Reserve. Not quite. The Fed has a finite amount of actual assets--mostly Treasury obligations backed by the "full faith and credit" of the government, which is a commitment to raise taxes if necessary to pay the debt. These assets total about $800 billion, some $400 billion of which have been obligated to back up loans. If the loans default, the Fed has to sell the Treasury notes in order to settle. If there are enough of these failures, the Fed could exhaust its assets. It would then have to resort to really "printing money"--issuing promissory notes not backed up by anything--or get bailed out by the Treasury, putting taxpayers further in the hole. Long before the Fed is down to the last of its stash of Treasury notes, more skittish domestic and foreign investors will flee the dollar. Interest rates would balloon and prices of oil and other imports would skyrocket. Credit would freeze, investment would plummet and tens of millions of Americans would be out on the street, with neither a job nor a roof over their heads.

[Celebration]

14. thanks

That's kind of what I was guessing. But how does issuing promissory notes not backed up by anything work? Our money isn't backed up by anything anyway. So, would this literally be "printing" money?

Like, we could choose between the Fed literally just printing up more money, OR this becoming part of the U.S. budget? Neither sounds good. I would think there would have to be some sort of vote to make this part of our budget. I guess they are just hoping we don't have to face this prospect.