“At the end of 2020, Steven Mnuchin created a mini media tempest (in a teapot) when he demanded that the Fed return tens of billions in unused funds backstopping the central bank’s various emergency, 13(3) programs. While the news spark a mini furore in financial circles and in Congress where reps and Senators scrambled to understand just what had happened and grilled Mnuchin over the request, with far too much drama to list since then everyone promptly forgot about this until today when the Fed announced on its website that it has returned $42 billion to the U.S. Treasury, and will soon transfer another $20 billion in excess funds connected to emergency lending facilities that stopped offering new loans last month.
According to Bloomberg, which first reported on the remittance, the transfers will fulfill the promise made by Jerome Powell on Nov. 20 to comply with Steven Mnuchin’s “controversial demand” that the programs be terminated.
As a reminder, the Treasury had committed $195 billion from its Exchange Stabilization Fund to provide a backstop for the four programs and had transferred $102.5 billion to the Fed. The programs are retaining about $40 billion to protect against potential losses on the credits the programs extended before their closure.”
The History and Organization of the Federal Reserve: The What and Why of the United States’ Most Powerful Banking Organization
January 10, 2019 | By Cathryn Austin Fitts | Solari Report
“The Federal Reserve is one of the most influential organizations in the U.S. when it comes to economic policy. It is also one of the least well understood elements of the government–especially in that it is not really truly a government organization. Its top level officials are a government agency of the Executive branch. However, the Federal Reserve, and especially its 12 Federal Reserve District Banks, occupy a strange twilight zone between government agency and private banking organization.
This status has come up in court cases, where the district banks of the Federal Reserve have argued successfully that they are not a government agency–instead being classified as “federally created instrumentalities” (Scott v. Federal Reserve Bank of Kansas City, No. 04-2357 (8th Circ. Ct of App, 2005) (available at http://media.ca8.uscourts.gov/opndir/05/04/042357P.pdf)). A cynical person might say that they are part of the Federal government where advantageous and separate when it is not. However, it is enough to say that the Federal Reserve has a complex, hybrid structure to it.
The Federal Reserve itself has quite a bit of involvement in creating the monetary policy of the U.S. The most commonly discussed ways it influences the economy include acting as a last resort lender to member banks, regulating private banking, and–perhaps above all–setting the discount rate on loans to solve temporary liquidity issues for private banks across the county.
As the bank of the U.S. Federal Government, there is obviously great concern and interest in the financial goings on of the Federal Reserve. This has led to multiple attempts to audit the Federal Reserve–usually with Congress turning to the Government Accountability Office (GAO). The GAO is a Congressional agency which investigates federal spending. As we’ve discussed in previous articles, these duties are accomplished with varying levels of success by topic. (See The U.S. Statutes Creating Modern Constitutional Financial Management and Reporting Requirements and the Government’s Failure to Follow Them, available at https://constitution.solari.com/the-u-s-statutes-creating-modern-constitutional-financial-management-and-reporting-requirements-and-the-governments-failure-to-follow-them/.) Congress has requested studies as to the lengths to which the GAO can investigate the financial goings on of the Federal Reserve. (See e.g., Federal Reserve System Audits: Restrictions of GAO’s Access, available at https://www.gao.gov/products/T-GGD-94-44.) In 1978, the Federal Banking Agency Audit Act placed the Federal Reserve under the audit authority of the GAO–reversing the 1933 Banking Act provisions that originally removed this authority (31 USCA §714, available at http://www4.law.cornell.edu/uscode/31/714.html). Since this change, there have been dozens of GAO audits of the Federal Reserve. These audits have led to suggestions from the GAO on everything from check clearing policies to larger regulatory reforms (see id.). This being said, there are some notable exceptions to the areas the GAO can look into, including:
“(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, open market operations; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items” (id.).
These are substantial exemptions. In order to understand just how substantial, it’s necessary to more fully understand the structure and role of the Federal Reserve. It’s worth noting that there have been multiple attempts in Congress to implement a more thorough audit nearly every year–including last year. (See e.g., H.R. 24, Federal Reserve Transparency Act of 2017, available at https://www.congress.gov/bill/115th-congress/house-bill/24?q=%7B%22search%22%3A%5B%22Federal+Reserve+Transparency+Act+of+2017%22%5D%7D&r=4.) These attempts have never succeeded. In past articles, we have discussed the problematic lack of transparency in government spending–especially in certain executive agencies. The Department of Defense and the Department of Housing and Urban Development have over $21T unaccounted for–approximately the same amount as our current national debt. (See e.g., The Missing Money, available at http://missingmoney.solari.com.) There is an obvious need for greater financial transparency and regulatory compliance in the government.
In order to understand the role and issues of the Federal Reserve System, this series intends to take a look at the inner workings and functions of the Federal Reserve. To do a true deep dive on this issue can and has taken volumes to properly explore every avenue. Our goal with this series is to instead give a strong overview of the Federal Reserve, its functions, and its issues. Later articles will discuss the Federal Reserve Act in more depth (as well as the twilight-zone legal classification of a “federally created instrumentality”), the lending practices of the Federal Reserve, and some of the problems inherent to the most powerful banking organization in the U.S. and potentially the world.
The Federal Reserve handles the government’s accounts, funds, and security transactions, and implements monetary policy (mainly through the New York Federal Reserve Bank, discussed below). However, in order to give the best understanding of the Federal Reserve itself, we will start by looking at the history and structure of the Federal Reserve–the what and why of the United States’ most powerful bank.”