It’s Not Just the Obama Administration That is Flouting the Law, So is The Fed—Part One

Eccles building cc

This is what the Fed would prefer you not know.

By now everyone knows that the Obama administration is deliberating choosing to disregard some laws, most notably Obamacare and immigration statutes, among others. By contrast, the Fed’s extra-legal moves have gone almost completely unreported by the press.

For example, the Fed recently issued its annual report. Some news stories focused on the big unrealized loss ($53 billion) in its securities portfolio, but none noted the illegal way in which the Fed created this loss.

One story described Republican critics of the unrealized loss as “unsophisticated,… primitive,… [ holding] childlike beliefs about monetary policy.” Don’t they know that the Fed contributed $79 billion to the Treasury last year, a sum larger than the unrealized loss and a big help for the federal deficit?

Let’s dig a little deeper here. How exactly did the Fed generate that payment for the Treasury? First, it created money out of thin air. Second, it used the new money to buy bonds from Wall Street, the same bonds that Wall Street had earlier bought from the government. So in effect, the government bought its own bonds with new money it had created. In effect, the government had borrowed from itself, but in a way that was intentionally hard to follow.

It is not just nonsensical for the government to borrow from itself. It is also illegal. But when it is done in this indirect way, using Wall Street as an intermediary, it is technically legal. Since this sleight of hand is considered legal, this is not what we mean when we say the Fed has been operating illegally. We have to dig a bit deeper still.

As most people know, the Fed has been buying trillions of dollars worth of bonds with newly created money since the Crash of 2008, and also buying riskier bonds. As noted by leading Fed analyst John Hussman, the Fed violated Section 14(B) of the Federal Reserve Act when it bought $1.5 trillion of Fannie Mae and Freddie Mac mortgage bonds not explicitly guaranteed by the US government.

Holding risky bonds means that the Fed can incur a loss on their sale. That is why it has reported $53 billion in unrealized losses at the present time. Moreover these losses can multiply depending on what happens to interest rates and other factors.

Why should we care? For one thing, the Fed illegally issued a note to its Statistical Release H 4.1 on January 6, 2011 stating that any of its losses would henceforth be a liability of the Treasury, that is, a liability of the taxpayers. So, if the Fed gets in trouble running its giant hedge fund-like operations, taxpayers will be expected to bail it out.

Who gave the Fed a right to offload its losses on taxpayers? The Treasury may have agreed, but it is blatantly illegal without approval from Congress. And even if approved by Congress, it is arguably unconstitutional, because Congress cannot delegate its right and obligation to commit taxpayers’ money.

It has been alleged that this is all worrying about nothing. If the Fed doesn’t ever sell any of the securities it currently holds, it will never realize any losses, and the taxpayers will never be on the hook. The Fed has already said that it does not plan to sell its mortgages.

But it’s not that simple. Some of the bonds were bought at a premium. This bit of financial jargon means that when the bond is completely paid off, there will still be a loss on the books. Technically this means that the Fed has added to our national debt without authorization. Meanwhile there is a much more serious problem.

If the Fed wants to raise interest rates, it must sell securities. Just to raise interest rates to a bare 2%, still low by historical standards, would require the sale of between one and two trillions dollars of securities. A Fed that cannot sell without bankrupting itself or presenting a huge bill to the taxpayers has painted itself into a corner. It has limited its flexibility to raise interest rates even if consumer price inflation is accelerating.

Part Two of this article will discuss additional games the Fed is currently playing, both legal and illegal.

38 comments
William A Benson
William A Benson

Aw quit your whining. Why not tell the American People just how much tax Wall Street had paid since 1982. Now that's a REAL story friend.

Tom Chenault
Tom Chenault

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." ~ Henry Ford

Tom Chenault
Tom Chenault

Unlike climate change, inflation is man-made, not nature. You can play with numbers all day, but the main point everyone is saying is the Fed, with no gold standard, creates money out of thin air to buy U.S. bonds. So, they make interest from our income taxes on fake money, wihich is unconstitutional and why the authority needs to go back to the U.S. Treasury, not a private banking cartel. JFK, Ron Paul (and Andrew Jackson and Thomas Jefferson) did not believe we should pay interest on our our own money. Plus, there is way to much power in a central bank. Check out plank 5 of the Communist Manifesto.

Cole Kendrick Woolsey
Cole Kendrick Woolsey

I’m sorry, I’m confused. Maybe my math is wrong, or I am missing the point by a very wide margin! I used a spreadsheet populated with IRS data that examined the dollar’s value from 1913 to 2006. If we assume the dollar lost 95.1% of it’s value during this time, then the average good that cost $1 in ’06 was priced at 4.9 cents in 1913. So the average price level of goods increased by 1930% in that time. That’s unquestionably a significant statistic, but average earned income rose from $740/yr in 1913 to $49,300/yr in ’06 or it increased by over 6500%. Adjusting for inflation, $740/yr in 1913 is $15,000/yr in 2006 dollars. So, the real purchasing power of the average American has increased by about 230%. Sorry again if what I’m saying makes no sense. Also, is the chart assuming the individual held the money and didn’t seek interest from a bank?

Pamela Jeffers
Pamela Jeffers

The Fed needs to be audited by special independent non government people with the power to demand an honest full account of their practices and to hold them accountable for their actions

Tom Chenault
Tom Chenault

The chart is correct. Inflation is a cruel tax on the poor, so they need food stamps, which further drives the economy into the ground. JFK tried to stop it. "When President John Fitzgerald Kennedy – the author of Profiles in Courage -signed this Order, it returned to the federal government, specifically the Treasury Department, the Constitutional power to create and issue currency -money – without going through the privately owned Federal Reserve Bank." http://beforeitsnews.com/new-world-order/2013/10/this-is-how-it-began-history-of-federal-reserve-jfks-executive-order-11110-video-296.html

Susan Highley
Susan Highley

It is the entire Government, all of them stealing and lieing with no penalty !!

Kay Martin
Kay Martin

Should do away with the Fed & obama and everyone would be better off.

Eddie Kelley
Eddie Kelley

liberals frequently claim that the trust is misleading.

Howard Baird
Howard Baird

whats that song in cadence government pays you 100 dollars takes back 99 you all in the army remember that right

Richard Landry
Richard Landry

The Fed is in violation of the National Government being the only one allowed to print money.

Donald Hughes
Donald Hughes

A full federal reserve audit might end fascism real quick. They stole 16 trillion dollars

Bill West
Bill West

Not that I support the Fed (OUTLAW THE DAMNED THING), or the Admin (impeach and imprison imo) but there's a basic misunderstanding here. That is that the Federal Reserve Bank isn't any more a part of the federal government as Federal Express is. It is a privately held Delaware corporation, a cartel. The government borrows fro this private company, that's the real shame of it.

Karen Elder
Karen Elder

Watch out! Your taxes are going to go up due to this fiasco!

Dan Shellenbarger
Dan Shellenbarger

i just printed a ghazillion dollar bill,, you all owe me a lot of money,,PAY UP!!

Erick Mixer
Erick Mixer

Central banking and social engineering by the NWO

Phil Ortiz
Phil Ortiz

The Fed is the law and answers to no one!!!

Erick Mixer
Erick Mixer

I read the book Mrs. Graham and it would surprise a lot of people about The Federal Reserve There is nothing Federal about it and Mr. Bowden is spot on about interest and imaginary money.

Peter Namtvedt
Peter Namtvedt

This article shows clearly how fraudulent the Federal Reserve Bank is, how sleight of hand is used to cover up the fact that the U.S. government is borrowing from itself (along with borrowing from Japan, China and the general public). What might be missing is the fact revealed by Keith Weiner, that there is no way out of the debt as long as the legal tender is the dollar or is defined by the government instead of the market: gold alone can extinguish debt.

Craig Bowden
Craig Bowden

I can't believe people fall for the money creation, that is owed at interest. I use this example. No money exists. Someone says here's a hundred dollars, but you have to pay it back with 1% interest. Where does the additional dollar owed come from? No one seems to grasp we can't ever pay the Fed back, meaning we will always be indebted to the private bank system scamming the American people.

Shannon Tate-Graham
Shannon Tate-Graham

I hope some people with backbones are elected, soon!! We need to abolish the Fed!!! Read: The Creature From Jekyll Island...fascinating look into the world of the Fed and Central Banking..

Doug Hattier
Doug Hattier

From my vantage point I would say that the Medieval Feudal system was a step up, in individual rights, from our present Nazi Socialist government!

Frank Villneauve
Frank Villneauve

A thief by any other name is still a thief. and major banksters are that.

Mattski Vogel
Mattski Vogel

Well no shit. Theyre an expense we can no longer afford people.

JoAnn Schnaufer
JoAnn Schnaufer

Oh, what a tangled web we weave when first we practice too deceive....

Craig Bowden
Craig Bowden

It's time to end the Fed. www.Craig4Congress.org

Charles Kudla
Charles Kudla

Yeah, but, is the check in the mail ? It's cold and I need a fire starter.

Christopher Lind
Christopher Lind

The fed is about as federal as Federal Express... It is unconstitutional and accountable to no one... Down with the red shield!

Jeff House
Jeff House

He is more out in the open about it....but ALL are guilty!!!!!