Wednesday, March 21, 2012

Qantitative Easing and Central Bank Profits: Don't No Bloggers Know Nuthin' No How?

WASHINGTON (MarketWatch) The Federal Reserve and its district banks said Tuesday it earned $77.4 billion last year, down from $81.7 billion in 2010 but the second-highest level in the central bank's history. The bumper earnings allowed the Fed to distribute $75.4 billion to the U.S. Treasury, also the second-highest level ever. The earnings was derived primarily from $83.6 billion in interest income on securities acquired through open market operations, from Treasury securities, federal agency and government-sponsored enterprise mortgage-backed securities, and GSE debt securities.

On this, WRH Commented:
Can you imagine what that 77 billion dollars would have done in circulation in the US, rather than as profit to a private central bank to which charges the US government interest to borrow from it?
Which is completely arse backwards.

In the operations reported, the Fed was buying stuff from anyone who was in the market to sell. The stuff purchased, which included both government and privately issued securities, earned the Fed interest that contributed to its profits of $77.4 billion. Of that profit, the Fed delivered to the US Treasury $75.4 billion, i.e., the total profit less the Fed's seemingly quite adequate operating expense of $2 billion.

So all of the Fed's supposedly outrageous net profit actually went to the US government, which promptly put it into "circulation in the US" through its massive program of deficit war-mongering and welfare spending.

And over at the Slog, we find this:
The money siphoned out of the US economy by the banks during QEs 1 and 2 – calculated against the lending they might have produced for US exporters - nets out at a deficit reduction of some $2 trillion.
Now the Slog has much to say that is eminently sensible and all that it says is said well, whether it is sensible or not, but this statement is not sensible at all.

QE and bank bailouts are not the same thing at all. Bailouts are, in fact, repayable loans backed by more or less credible collateral. And although the Fed's bank bailouts have been massive, $16 trillion, in fact, they have all been repaid (see Page 137 of the Government Accountability Office report on the US Federal Reserve).

QE is something altogether different. It consists in buying securities in the open market, usually government bonds, using "ink money", i.e., money that has been created out of thin air for the sole purpose of increasing the money supply. As indicated above, the income derived from the acquired financial instruments is turned over to the US Treasury, less the Fed's operating expenses, and used to finance the operations of government.

So, no, QE does not deny US industry capital to finance its operations. On the contrary, it injects money into the financial system that stimulates the economy through increased business investment, construction and consumption.


  1. The implication of your article, though likely factually correct (I haven't enough knowledge in this area to be completely sure) is that the 'Fed' is a benign force for good. Instincts tell me this is unlikely to be the complete picture. Can you elucidate exactly how the 'Fed' operates to the benefit of the ruling elite (or whatever you want to call them)?

    1. Harry, you ask the sixty-four trillion dollar question: What does the Fed do and why.

      The short answer is that I do not know, although I have some thoughts on the subject that I will try to post tomorrow.

    2. Here's my response the question of whether the Fed is truly evil.

  2. I think there's little doubt that the Fed is truly 'evil'. At the very least it doesn't appear to operate to the best interests of the American people. How that 'evil' manifests itself is, as you say, the question. A few quotes that may shine a light on the situation.

    "If, as it appears, the experiment that was called 'America' is at an end ... then perhaps a fitting epitaph would be ... 'here lies America the greatest nation that might have been had it not been for the Edomite bankers who first stole their money, used their stolen money to buy their politicians and press and lastly deprived them of their constitutional freedom by the most evil device yet created, The Federal Reserve Banking System." 

    G. D. McDaniel

    "We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilisation may collapse unless it becomes widely understood and the defects remedied very soon."

    Robert H. Hamphill of the Atlanta Federal Reserve Bank.

    "Throughout the ages, the devices of cunning men have turned money to their nefarious purposes. Money, beginning with private enterprise as a means of escaping the limitation of barter, soon developed the cheat to exploit the honest trader who, in an effort to protect himself, turned to government for protection, only to find that now he had two thieves, the private money changer and the political plunderer working hand in glove against him. By this combination the money changer gained the prestige of political sanction through legislative license and the state secured a deceptive device for laying taxes upon the citizenry (by means of the hidden tax called inflation). It was and remains a vicious alliance."

    E. C. Reigel

    "People who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest." 

    Thomas A. Edison

    Carroll Quigley in his book Tragedy and Hope (page 324) posits a few ways in which the Federal Reserve system operates.

    "Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”

    1. Harry,

      I hadn't quite done with my investigation of whether the Federal Reserve is truly evil, and hoped to follow up in the not too distant future with an interview with Satan, who we can assume is qualified to pass judgement.

      But in any case, I believe that there is more evil in the American Empire than can be attributed solely to the Fed -- the arms dealers, for example, and the military contractors who obtain untold billions and even trillions from the American people, while inflicting terrible harm on people in faraway places who never did the United States any harm. In addition, are the drug companies and insurance companies behind ObamaCare, and many others who successfully lobby the US Government for tax expenditures of dubious value to the American people. Finally, there is the bureaucracy, itself, that administers the expenditure of almost half the wealth of the nation in ways that are often unconstitutional and showing of contempt for citizens who are groped, spied upon or bullied and beaten by those supposedly responsible for law enforcement and national security.

    2. Agreed CS but surely it's the same 'nexus of power and control' that is behind all those things listed. As such the Fed is just one of the tools at their disposal.

    3. "the Fed is just one of the tools at their disposal."

      Yes, it is necessary to understand that relationship to understand your Carroll Quigley quote. In the aftermath of WW1, there was high inflation that the banks wished to bring rapidly under control by imposition of deflationary policies. It was to this end that central banks sought to dominate governments.

      But as Quigley goes on to explain, the central bankers were losing out in influence to the private investment banks who, Quigley states, made and could unmake central bankers.

      The fact that central bankers could, during the interwar years, dominate governments was largely due, as Quigley points out, to the absence of a comprehensive economic theory to account for what was happening, which meant governments were essentially clueless and thus easily dominated.

      Today, the private investment banks have either gone bust (e.g., Barings) or been taken over by giant banking corporations (e.g., Morgan Grenfell). It is now the megabanks that have the greatest influence over monetary policy. Thus, for example, Goldman Sachs and the Bush administration seemed virtually synonymous, and Obama is equally a creature of Wall St.

      However, monetary policy is much better understood than it used to be, and so there could and should be adequate political control over the actions of the central bank.

      In the 20's and 30's central bankers are now thought to have over-emphasized "sound money" and a return to the gold standard, whereas today the great fear is that central banks will allow excessive monetary expansion, as happened in the US during Greenspan's tenure ad Fed Chairman.

      The Greenspan bubble created the bust of 2008, which led to monetary contraction, which the Fed has correctly, according to the generally accepted view, counteracted with low interest rates and money printing. The tough part for the Bernanke Fed will come when private sector borrowing begins to expand again, e.g., as a result of a US housing recovery. Will the Fed then take the tough actions necessary to claw back the money the Fed has emitted during the current recession by selling huge quantities of bonds thereby causing sharply increased interest rates that could abort the recovery, or will it let things rip, leading to a new and perhaps catastrophic inflation a few years down the road?

  3. Surely the expansion of the money supply beyond the natural growth of goods and services results in an inflation that serves as a form of hidden taxation. “Inflation is the one form of taxation that can be imposed without legislation” is a quote attributed to the economist Milton Friedman, but it perfectly explains why it's often called a hidden tax. However it’s not only governments that benefit, far from it. A review, produced by the St. Louis Federal Reserve Bank in November 1975, explained: "The decrease in purchasing power incurred by holders of money due to inflation imparts gains to the issuers of money.” Among those most affected are savers; people on fixed incomes and those with below inflation wage rises who are having purchasing power 'stolen' from every pound they’ve earned or saved.

    One other question. Is it only the Fed itself that 'creates' money or does that extend to the other banks that are part of the system? All of which creates 'interest. As the Federal Reserve in New York explains:

    "Because of the 'fractional' reserve system, banks, as a whole, can expand our money supply several times, by making loans and investments." "Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU."

    I found this series of videos of some benefit, although I haven't watched them for a while.

    1. "Surely the expansion of the money supply beyond the natural growth of goods and services results in an inflation"

      Yes, this is correct. But the money supply is not supposed to grow markedly faster than the production of goods and services, which is why, in the dialog that I recorded between a goldbug and a bank apologist, the Greenspan Fed came in for severe criticism for creating a Ponzi economy in which rapid money supply growth occurred through the unregulated loan-creating activity of private institutions.

      The digital money system that I have proposed, would deny private institutions the right to create money and it would also prevent the government from clandestinely engaging in inflationary finance because the total quantity of money in circulation would always be public knowledge.

      I do not believe it is the case that all US dollars are debt based. Until the US dollar ceased to be convertible to gold, anyone with gold could exchange it for dollars. Thus at least some of the money in the system is accounted for by the gold in Fort Knox. In addition, when the Fed prints money to purchase US Treasury bills and bonds, the effect is little different from if the Treasury printed the dollars itself. True, the Treasury has to pay the Fed interest on the Bonds it has issued in exchange for the cash, but the profit the Fed earns on those bonds is then repaid to the Treasury, so the money does not represent a significant and perpetual burden on the taxpayer.