October 10, 2008 Comments

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..

      Michael
      http://www.nutritional-supplements-review.net
    • mike
      http://www.youtube.com/watch?v=e3zo7zjYk2E

      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

      JUST THE FACT GOLDMAN SACHS HAS HAD SUCH IMPOSSIBLE SUCCESS AT TRADING IS ALL THE PROOF OUR GOVERNMENT NEEDS TO KNOW TO PROVE MANIPULATION!!!!!!


      AUDIT THE FEDERAL RESERVE

      http://www.auditthefed.com/


      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.
    • If the Federal Reserve gave too many bad loans out though and was at risk at failing, don't you think the US government would intervene?
    • Redditor
      Sorry, but the "tax on the average Joe" is the decrease in the value of the dollar. If the fed increases the supply of money, the value drops, it's that simple...
    • Yes, I believe that was the same point that MD was making. You may be correct and that might be exactly what the authors meant.
    • amy
      I just followed your link to the main page of the bill, and it says the United States Treasury, not the Federal Reserve Bank. It is the taxpayers, not the Fed.
    • Yes, I am aware of this, it is exactly what my point was. The bill is a government sponsored plan. Because it has gotten so much coverage in the press, reporters are quick to mention the actions of the Federal Reserve as actions of the U.S. government.
    • After reading your post, I am fairly certain that you don't fully understand how it works either.
    • Could you please elaborate on what it is you believe I misstated?
    • uh
      It's a quasi-government organization. You cannot really talk about the Federal Reserve without talking about the United States government, it's our central bank for god's sake. If you don't understand how the two are inextricably linked you don't know how the fed, or central banking in general, functions.

      http://en.wikipedia.org/wiki/Federal_Reserve_Sy...
    • Fred Flange
      Well perhaps their use of English is a bit better than yours.

      viz. "Unfortunately I do not think that such errant reporting is not limited to foreign reporters"

      Double negative - or perhaps that should be treble negative when comment itself is taken into account

      Best

      Fred F
    • Perhaps it is. Thanks for the correction and English lesson, I've updated the post accordingly.
    • MD
      I don't disagree with your overarching thesis, that the media does not understand the Fed and has often mis-reported exactly what is going on, but I do disagree with your analysis of the Fed's actions as not costing tax payers because there is no tax related revenue on their balance sheets.

      Whenever the Fed creates money, or goes further into debt it is essentially "taxing" the American people, and anyone else with significant reserves in USD via their inflation of the monetary supply. Unfortunately for tax payers, since any individual does not hold much, they do not get the same sweetheart deals issued to places like China and Saudi Arabia. We "borrow" the money from them so that as we pay back our debt, they get a nice return and avoid losses from being "taxed" by the inflationary maneuver.

      The taxpayer is put at risk because of the manipulation of the intrinsic value of our currency. The Fed's debt is America's debt. When we need to pay it down, it will be taxpayer dollars that do so.
    • You do make an interesting point in your analogy of inflation as a tax. It certainly has been evident for some time that the Fed has been quite intent on depreciating the dollar with its monetary policy.
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