What happened to FED capitals account in the beginning of 2016

In the beginning of 2016, there was a $19.3 billions drop in Federal Reserve capitals account, as illustrated in this chart:

FED capitals breakdown

FED capitals breakdown

It befuddled some commentators, including Mike Maloney in his recent video in which he resorts to his usual tone of a conspiracy may have been covered up:

But it turns out, the operation was largely public but may have been under reported, according to an article from Los Angles Times: Federal Reserve sends record $97.7-billion profit to Treasury.

Nevertheless, it does raise the concern that such operation could “sets a bad precedent and impinges on the independence of the central bank.”

Understanding FED Balance sheet

FED balance sheet is just like any other company, it has 3 major sections: Assets, Liabilities and Capitals(or Equity). And Assets = Liabilities + Capitals.

FED assets is composed of

  • Gold stock/certificate, for which actual physical gold is held by Treasury at places such as Fort Knox. Of which gold is arbitrarily valued at $42.222 per ounce, significantly below current market price1)http://www.federalreserve.gov/faqs/does-the-federal-reserve-own-or-hold-gold.htm – Does the Federal Reserve own or hold gold?.
  • Coin
  • Securities including U.S. Treasury securities, Federal agency debt securities and Mortgage-backed securities(MBS). Of which, it has ballooned since the financial crisis of 2008
FED assets breakdown

FED assets breakdown

FED liabilities are mainly composed of:

  • Federal reserve notes, or dollar bills. Yes, they are basically a debt held by Federal Reserve, and it used to give a some ounces of gold until the Nixon Shock2)https://en.wikipedia.org/wiki/Nixon_Shock – Nixon Shock.
  • Deposits banks hold at the Federal Reserve.
  • Reverse purchase(repo) agreement, which also increased a lot since the 2008. They act as a insurance for big banks, where they can hold certain securities at high price without worrying about the risks, because the FED can come to the rescue with printed money according to these repo agreements!
FED liabilities breakdown

FED liabilities breakdown

FED capitals account is comprised of

  • Capital surplus account, this is where $19.3 was sent to the treasury. It is similar to a retained earnings account in a operating company.
  • Paid-in capital, it is like equities of a company. FED may have started with physical gold as paid-in capital in 1913 when it was founded. And during the time, they could simply account portions of retained earnings(capital surplus account) to equities(Paid-in capital).

An interesting observation here is that, for stock investors, one metric can usually tell how risky a business is, that is the Equity-to-debt ratio. The high the number, the higher debt burden a company is undertaking. “The average D/E ratio for the financial services industry is made up of more concentrated sectors, including closed-end debt funds with a D/E ratio of 32.32, insurance brokerage companies with an average D/E ratio of 120.95, and credit services companies with an average D/E ratio of 455.74. Closed-end equity funds have the lowest D/E ratio, at 2.04, while mortgage investment banks have the highest average of 5433.44 3) What is the average debt/equity ratio of companies in the financial services sector? | Investopedia http://www.investopedia.com/ask/answers/032315/what-average-debtequity-ratio-companies-financial-services-sector.asp#ixzz3zTyPQEUy .” So what is the Equity-to-debt ratio of the FED? After the treasury took some of its profit, it is now standing at a nose-bleeding 11000% !!

How does the Treasury take profit from the FED legally

Not only did the Treasury take a cut in the capitals surplus account, but it also took a cut in the FED’s MBS profit. It turns out “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. The Board of Governors requires that excess earnings of the Reserve Banks be transferred to the Treasury as interest on Federal Reserve notes.”

So it is indeed legal for the Treasury to take profit from the FED. But the question we ought to ask is instead, is there enough balance and checks in this legal setup? After all, what happens in a simplistic view is that:

  • the FED buys government bond from the Treasury and MBS from the Fannie Mae and Freddie Mac
  • the government taxes citizens and business to pay interests on bond issued by the Treasury
  • citizens pay their mortgages indirectly to the FED
  • And FED redistribute its profit to its shareholders 4) http://www.federalreserve.gov/faqs/about_14986.htm – Who owns the Federal Reserve? and the Treasury.

Anyone with a sane mind would smell something really strange about this shenanigan circle of debt and taxes. It is now your turn to have a better understanding of the world you are living in and spread the knowledge and make a change for a better world.

 

References   [ + ]

1. http://www.federalreserve.gov/faqs/does-the-federal-reserve-own-or-hold-gold.htm – Does the Federal Reserve own or hold gold?
2. https://en.wikipedia.org/wiki/Nixon_Shock – Nixon Shock
3. What is the average debt/equity ratio of companies in the financial services sector? | Investopedia http://www.investopedia.com/ask/answers/032315/what-average-debtequity-ratio-companies-financial-services-sector.asp#ixzz3zTyPQEUy
4. http://www.federalreserve.gov/faqs/about_14986.htm – Who owns the Federal Reserve?