Why is taxpayer money used to pay the Federal Reserve principal+interest on the bonds it buys?

[nodeal]

This question arose in my head after watching what I consider to be a wonderfully done documentary on our monetary policy: "The Biggest Scam In The History Of Mankind - Hidden Secrets of Money 4" by Mike Maloney.

In it, Mr. Maloney breaks down and tries to simplify the scheme that is our monetary system in easy to follow steps. He explains how money is created starting with the treasury issuing a bond (a glorified IOU) when the government engages in deficit spending. These bonds are then purchased by bankers. The bankers then sell the bonds to the Federal Reserve. The Federal Reserve writes a check to the bankers as a form of payment for these bonds. However, the account the Federal Reserve writes these checks from essentially has a balance of zero. The Federal Reserve is basically writing fraudulent checks to the bankers to pay for the bonds that the bankers bought from the treasury. This is how currency is created.

Later on in the video, Mr. Maloney goes on to explain that a large majority of our taxes go to paying the Federal Reserve the principal plus the interest on these bonds that the Fed bought up. This is where I get a little confused. Why does the Federal Reserve even need this money from the tax payers? If they can write checks from an account with a balance of zero, and the checks don't bounce (essentially creating money), why do they need tax payer money to pay the principal plus interest? What does it matter if they get these payments or not? Whatever they are getting in taxpayer money must be very small compared to the checks they are writing for the bonds. If you have the power to create money, why do you even need the payments on the principal plus the interest?

If I am not explaining this clear enough here is the video from which I am getting this information: http://www.youtube.com/watch?v=iFDe5kUUyT0

The explanation of the parts I am talking about begins at the 1:45 mark.

Thanks for any clarity

 

[devil21]

Because the 'money' the Fed issues is valueless at issue. The money the Fed takes back as 'income tax'/debt interest is backed by the labor of whomever earned it and therefore has value.

 

[FindLiberty]

must work, pay harder to get out of debt... LOL TRILLIONS!

 

[nodeal]

Because the 'money' the Fed issues is valueless at issue. The money the Fed takes back as 'income tax'/debt interest is backed by the labor of whomever earned it and therefore has value.

hi friend can you explain that a little more? Does it gain value once the bankers receive the cash from the Federal Reserve for the bonds? Or when the treasury gets cash from the bankers in exchange for bonds? I'm just confused when/how the money created by the fed makes the transition from being valueless to having value. If it only had value when it comes from the pockets of the taxpayer then why do banks sell the bonds for this valueless money? Sorry just a little clarification needed. Thanks

 

[ClydeCoulter]

hi friend can you explain that a little more? Does it gain value once the bankers receive the cash from the Federal Reserve for the bonds? Or when the treasury gets cash from the bankers in exchange for bonds? I'm just confused when/how the money created by the fed makes the transition from being valueless to having value. Thanks.

Once it is accepted by the Treasury.

 

[Zippyjuan]

All holders of US debt are paid interest on the US Treasury notes they buy. But there is a difference- the Fed doesn't keep the interest they get- they return their profits (after costs) to the US Treasury. With income from other sources in addition to interest collected on their US Treasury holdings, it is a net gain for taxpayers. Last year they gave $77.7 billion to the US Treasury. http://blogs.wsj.com/economics/2014/01/10/fed-sent-77-7-billion-in-profits-to-treasury-last-year/ so actually it doesn't cost the taxpayers when the Fed holds US debt.

Later on in the video, Mr. Maloney goes on to explain that a large majority of our taxes go to paying the Federal Reserve the principal plus the interest on these bonds that the Fed bought up.

He is also wrong that a majority of our taxes go to paying interest on our debt- to all holders not just the Fed. We paid (the government collected) about $3 trillion in taxes and interest on the debt to ALL holders was $430 billion. The Fed has $2.4 trillion of our total $15 trillion debt or 16%. http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

 

[nodeal]

All holders of US debt are paid interest on the US Treasury notes they buy. But there is a difference- the Fed doesn't keep the interest they get- they return their profits (after costs) to the US Treasury. With income from other sources in addition to interest collected on their US Treasury holdings, it is a net gain for taxpayers. Last year they gave $77.7 billion to the US Treasury. http://blogs.wsj.com/economics/2014/01/10/fed-sent-77-7-billion-in-profits-to-treasury-last-year/ so actually it doesn't cost the taxpayers when the Fed holds US debt.



He is also wrong that a majority of our taxes go to paying interest on our debt- to all holders not just the Fed. We paid (the government collected) about $3 trillion in taxes and interest on the debt to ALL holders was $430 billion. The Fed has $2.4 trillion of our total $15 trillion debt or 16%. http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

I am confused. Is the point you are trying to make that the monetary system we have in place is good for taxpayers?

So the taxpayers pay money to the Fed for the principal plus interest, and then the Fed RETURNS this money to the Treasury? How is that sustainable? And also, how is this a net gain for tax payers if the Fed originally purchases the bonds from an account that essentially has a zero balance. Sorry, I am just trying to understand what you are saying.

 

[devil21]

Sorry I am confused. Is the point you are trying to make that the monetary system we have in place is good for taxpayers?

I'll try to expand on my earlier post at a later time when I have more time. It's way too complicated for a quick post and requires references to other sources.

Zippy forgets to mention that the Fed's shareholders receive (officially at least, per the Fed Reserve Act, the real figure is anyone's guess) a return of 6% per year for each of their shares held in the Fed. The shareholders profit from the Fed and in real dollars that are implicitly backed by labor. The US gov't went officially bankrupt many years ago, then bankers stepped in to "help out" by offering to erect a central bank which would accept American's labor as collateral for the new currency, thus allowing the US gov't to continue borrowing on the backs of the People.

 

[nodeal]

I'll try to expand on my earlier post at a later time when I have more time. It's way too complicated for a quick post and requires references to other sources.

Zippy forgets to mention that the Fed's shareholders receive (officially at least, per the Fed Reserve Act, the real figure is anyone's guess) a return of 6% per year for each of their shares held in the Fed. The shareholders profit from the Fed and in real dollars that are implicitly backed by labor. The US gov't went officially bankrupt many years ago, then bankers stepped in to "help out" by offering to erect a central bank which would accept American's labor as collateral for the new currency, thus allowing the US gov't to continue borrowing on the backs of the People.

Thanks I would really appreciate if you could go further into it, looking forward to your response

 

[devil21]

Here's a start for understanding the Fed.

 

[nodeal]

Here's a start for understanding the Fed.

Thanks, yes I have seen this video.

I also read End the Fed a while ago, though admittedly I should brush up on it. I remember enjoying the book, but my main issue was that it didn't explain HOW The Fed does what it does. It didn't break down the process of currency creation and what is truly going on throughout each step that causes our financial crisis. It more focused on the consequences of our monetary policy, but not really the inner-workings of it.

That's why I enjoyed the video by Mr. Maloney that I posted in my original message. It broke down the steps and made it easy to understand and follow. However, this led me to ask why they even need taxpayer money to pay them back the interest if they can write checks and create currency out of nothing.

Now having received some responses, I have a few other questions. Mainly, when does money actually have value? It was stated on this thread that it has value when it reaches the Treasury. What exactly causes this "value"? It was also mentioned that the money has value once it is paid back to the Fed because it is not backed by the labor of the citizens. This I understand, but if the money had no value before that, how does the Treasury fund public works projects when it first exchanges bonds for currency and spends that currency?

And now that I have been told in this thread that The Fed pays the interest back to the Treasury, and therefore it is a "net gain" for the taxpayers, I am even more confused. Why would the Fed pay interest back to the treasury? What is in it for the Federal Reserve and its shareholders if they just pay the money back to the treasury?

 

[devil21]

This is such an enormously complicated topic that it's easier to just post links to other sources since it's already been explained by others much better than I could ever paraphrase.

I'll post more as I have time.

http://www.henrymakow.com/us-citizens-property-collatera.html

 

[Zippyjuan]

I'll try to expand on my earlier post at a later time when I have more time. It's way too complicated for a quick post and requires references to other sources.

Zippy forgets to mention that the Fed's shareholders receive (officially at least, per the Fed Reserve Act, the real figure is anyone's guess) a return of 6% per year for each of their shares held in the Fed. The shareholders profit from the Fed and in real dollars that are implicitly backed by labor. The US gov't went officially bankrupt many years ago, then bankers stepped in to "help out" by offering to erect a central bank which would accept American's labor as collateral for the new currency, thus allowing the US gov't to continue borrowing on the backs of the People.

When a bank wants to join the Federal Reserve system, they are required give the Fed ten percent of their capital as a "membership fee". In exchange, they are given stocks which are not like regular corporate stocks- they can't be sold to anybody else and they have no voting powers. In return, the get a six percent annual dividend on what they had to pay for the shares. The dividend is not based on any profits like corporate stocks.

Example. A bank has $10 billion in assets. To join the Federal Reserve system, they must give up $1 billion to the Fed. Then each year they get six percent of that $1 billion back in the form of dividends- or $60 million.

http://www.federalreserve.gov/faqs/about_14986.htm

And now that I have been told in this thread that The Fed pays the interest back to the Treasury, and therefore it is a "net gain" for the taxpayers, I am even more confused. Why would the Fed pay interest back to the treasury? What is in it for the Federal Reserve and its shareholders if they just pay the money back to the treasury?

The Fed isn't a "for profit" institution. And as above in this post, the "shareholders" don't get a share of any profits the Fed may generate- those go to the US Treasury.

 

[nodeal]

This is such an enormously complicated topic that it's easier to just post links to other sources since it's already been explained by others much better than I could ever paraphrase.

I'll post more as I have time.

http://www.henrymakow.com/us-citizens-property-collatera.html

Thank you keep them coming.

The Fed isn't a "for profit" institution. And as above in this post, the "shareholders" don't get a share of any profits the Fed may generate- those go to the US Treasury.

Very interesting. I take it you are in favor of the Federal Reserve system then? Lol I am surprised you have so many rep points. I take it you clash with many forum members here?

 

[devil21]

6% each year is the key since that adds up and exceeds initial "investment" very quickly. Especially when the same banks never go away. JPM was an original shareholder in the Fed according to most sources. 100 years now @ 6% of initial investment per year. Right before 1933 their initial investment was recouped. What happened in 1933? EO6102.

Anyone remember GMAC? They're called Ally Bank now. They change names, consolidate, split back up.....but they don't go away. As long as the Federal Reserve Act is still law, at least.

 

[H. E. Panqui]

no deal asks: 'What exactly causes this "value"?'


http://whatreallyhappened.com/WRHARTICLES/hickory.html?q=hickory.html

William Gouge gets to the essence: "If the superior credit the banks enjoy grew out of the natural order of things, it would not be a subject of complaint. But the banks owe their credit to their charters – to special acts of legislation in their favor, and to their notes being made receivable in payment of dues to government. The kind of credit which is created for them by law, being equalpollent with cash in the market, enables them to transfer an equal amount of substantial wealth from the productive classes to themselves, giving the productive classes only representatives of credit or evidences of debt in return for the substantial wealth which they part with. . .

 

[TheCount]

I am confused. Is the point you are trying to make that the monetary system we have in place is good for taxpayers?

Very interesting. I take it you are in favor of the Federal Reserve system then? Lol I am surprised you have so many rep points. I take it you clash with many forum members here?

I'm not sure why you feel like correcting misinformation about how the Fed really works automatically requires that the person supports the Fed system and thinks that it is great. One does not necessarily imply the other.

 

[Paul Or Nothing II]

Note : I don't support ANY taxes. I don't support central-banking. But I do support dissemination of FACTUAL information.

If they can write checks from an account with a balance of zero, and the checks don't bounce (essentially creating money), why do they need tax payer money to pay the principal plus interest? What does it matter if they get these payments or not? Whatever they are getting in taxpayer money must be very small compared to the checks they are writing for the bonds. If you have the power to create money, why do you even need the payments on the principal plus the interest?

Fed doesn't need that money but the government does & as Zippy has pointed out, most of the Fed's profits are transferred to the government (although I do agree with devil21 that even minor profits every year given to the member banks can add up over time but just like it is with people, a lot of the ROI is eaten up by inflation).

So, whatever interest is "paid" by the government to the Fed (from the taxes collected), most of it is given right back to government by the Fed, & it's the government that spends it. The interest "paid" on debt held in trust funds managed by government like Social Security also comes right back to government. So essentially, it's the interest paid on debt held by countries like China, Japan, etc & the debt held by companies & individual investors that actually has to be "paid".

hi friend can you explain that a little more? Does it gain value once the bankers receive the cash from the Federal Reserve for the bonds? Or when the treasury gets cash from the bankers in exchange for bonds? I'm just confused when/how the money created by the fed makes the transition from being valueless to having value. If it only had value when it comes from the pockets of the taxpayer then why do banks sell the bonds for this valueless money? Sorry just a little clarification needed. Thanks

Actually, money created isn't "valueless" as such, it has value the moment it's created because as you already understand, money is created in the process of buying something (it could be government bonds/debt or MBS or whatever). And obviously, when Fed buys a government bond from a bank, Fed credits the bank's account held with Fed with the necessary amount, & the bank accepts the payment because it is considered to have value.

 

[mrsat_98]

must work, pay harder to get out of debt... LOL TRILLIONS!

.

All this time I thought we where supposed to vote harder

no deal asks: 'What exactly causes this "value"?'

.

 

[acptulsa]

When a bank wants to join the Federal Reserve system, they are required give the Fed ten percent of their capital as a "membership fee". In exchange, they are given stocks which are not like regular corporate stocks- they can't be sold to anybody else and they have no voting powers. In return, the get a six percent annual dividend on what they had to pay for the shares. The dividend is not based on any profits like corporate stocks.

Example. A bank has $10 billion in assets. To join the Federal Reserve system, they must give up $1 billion to the Fed. Then each year they get six percent of that $1 billion back in the form of dividends- or $60 million.

http://www.federalreserve.gov/faqs/about_14986.htm



The Fed isn't a "for profit" institution. And as above in this post, the "shareholders" don't get a share of any profits the Fed may generate- those go to the US Treasury.

Are you completely unable to understand the question or are you just desperate to change the subject?