Media Does not Understand the Federal Reserve System

This morning a friend of mine shared an article titled: AIG borrows 57 percent of government loan. The very first thought that came to my mind was, “I don’t remember hearing anything about AIG ever receiving any government loans.” The article states:

The U.S. government had originally said it would loan AIG, once the world’s biggest insurer, $85 billion, but increased that to $122.8 billion on Wednesday as the company races to sell assets to pay off the loan before the credit turmoil makes buyers harder to come by.

When I read this it made me sick to my stomach. Not because of the staggering sums of money being lent to AIG, but because it is not a government loan. My initial thought was correct, as AIG has never received any government loans. Granted Reuters is a British based company, but you would think that if they are going to report on U.S. financial news, they would ensure that their reporters understand the Federal Reserve System.

Unfortunately I would seem that such errant reporting is not limited to foreign reporters. Earlier this week, the New York Times reported that the Fed is purchasing commercial paper to provide some additional liquidity to the credit markets (I came to learn of the NYT article from MyTwoDollars). Within the New York Times article the authors state:

While the move will put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has virtually dried up.

I’m not exactly sure how it puts more taxpayer dollars at risk, because the Federal Reserve is independent within government, and generates its own revenue with Open Market Operations. If you look at the Federal Reserve’s 2007 income statement, you’ll see no line items that indicate income from taxes. If the Fed incurs any losses, they would be losses for the Fed not taxpayers.

With all of the recent focus on the Emergency Economic Stabilization Act of 2008 (aka the $700 billion “bailout”), the media finds it convenient to label everything as a government-sponsored act. It is sensationalistic and inaccurate to equate the actions of the Federal Reserve as actions of the U.S. government. The next time you see the Federal Reserve and the U.S. government mentioned within the same article, be sure to take what you read with a grain of salt. It is likely that the author may not really understand how the Federal Reserve System works.

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    • MihchaelC

      How many private citizens who have claimed bankruptcy in the last 10 years could have used a personal stimulant package image that all the citizens get a bail out, then they shp, spend money and stimulate more..


    • mike

      I strongly believe we need a federal reserve audit. The recent stock market action suggests to me the federal reserve is intervening in a free and open market. I believe the biggest beneficiary of this TRILLION DOLLAR stock market move in a couple of weeks was Goldman Sachs. Goldman Sachs sells derivatives in our equity markets its apparent that Goldman Sachs Has Total Control Over our stock market using the unlimited capital available from the federal reserve. I believe Goldman Sachs doesn't have the best interest of our markets. They are misusing the federal reserve to manipulate the stock market and making huge 100 BILLION DOLLAR profits THIS IS ILLEGAL people expect our government to obey the laws just like citizen. Also this manipulation without regards for cost continues to put our government and the people more and more in debt



      Imagine controlling the Federal Reserve portfolio of commodities and equities. TO DO WITH AS YOU PLEASE!!!!!!!

    • Salih Eser

      Hello AMERICA wake up FEDERAL RESERVE BANK is a PRIVATE bank and has branches all over the WORLD.Last $786billion scam is the biggest deception, if you ask hard question about this bank you will probably so pissed of even yourself be surprised.By the way i take my hat to the JUDGE involved with this crocks.

    • Po'Boy

      oops - meant to say "principAL portion of the loan is paid"

      So on the one hand, if the Fed is creating and loaning money to banks, government, etc. it causes inflation and hurts those who hold US dollars. BUT the interest earned by the Fed is credited to the taxpayers.

      If it is foreigners loaning money to banks or the government, it doesn't cause inflation, but, of course, the interest goes out of the country, so our supply of dollars here in the US shrinks as the supply of dollars outside the US grows.

    • Po'Boy

      Most fascinating is when the Federal Reserve buys US treasury bonds to finance government overspending. The Fed creates money to buy whatever bonds it decides to purchase. But then - what happens when taxpayers pay the Fed back? What happens to the interest?

      My understanding is that when the Fed is paid back, any interest made is given to the US Treasury. (Wouldn't be fair for the Fed to keep interest on money it just created out of nothing). Also, keeps liquidity in the system, if the Fed was always paid back more than it created, the money supply would shrink. When the principle portion of the loan is paid back to the Fed, it is destroyed - or more likely, used to purchase more US government bonds.

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