Who Benefits From the Federal Reserve System? David Howden mises.org March 21, 2013 We recently looked at the Federal Reserve’s 2012 results. In particular, we pointed to some positive and negative developments. On a positive note, the Fed managed to shrink down the size of its balance sheet by approximately one-third of a percent. (Hey, it’s a start.) On a negative note, this decrease occurred because banks shifted their holdings of reserves into cash, thus forcing the Fed to sell off some of its assets. I explained that this is a potentially negative result, as the shift into cash brings with it inflationary pressure on prices. In this article I want to point out who has benefited from the Fed’s operations over the past year. There has been a lot of discussion about the large increase in reserves, and especially excess reserves, held by the banking system. Mostly this discussion is couched in terms of the increase in the money supply.
While the increase in excess reserves—less than $2bn in August 2008 to almost $1.5 trillion at the end of 2012—does represent an increase in the money supply, some rule changes accompanying the crisis
also signify that they are part of a bailout. One aspect of the Fedâ€™s crisis response was to commence paying interest on required and excess reserve balances. (The required reserve is the amount of money banks must hold to meet the minimum reserve requirement on deposits, and excess reserves are any amount held in excess of this minimum.) Interest on reserves is set at 0.25 percent, and is paid from the Fedâ€™s operating revenues to its member banks. As we can see in Figure 1 below, the Fed has paid the banking system nearly $4bn each year for the last two years to hold on to their reserves. Figure 1: Interest paid on reserve balances (annualized, $bn) Source: Federal Reserve Bank of St. Louis One way to think of this payment is as a sort of bailout. Since the payments on reserves are paid out from the Fedâ€™s operating revenues, it reduces its end of year profits by the same amount. Since these profits would normally be remitted to the Treasury, the policy of paying interest on reserves has been, in effect, a fiscal policy involving a transfer from the Treasury to the banking sector. Interest on reserves redirects taxpayer money to the banking system, over $4bn during 2012. This transfer from the Fed to the banking system is larger than any single year transfer from the Fed to the Treasury prior to 2009. The Fed estimates that it will remit to the Treasury $88.9bn from its 2012 operations, a record-breaking year. As we can see in Figure 2, there has been a steady increase in the amounts of remittances to the Treasury over the past decade, and especially since 2009.
Figure 2: Federal Reserve annual remittances to U.S. Treasury ($bn) The sharp increase after 2008 was the result of the quantitative easing policies. By increasing the money supply, the Fed had to purchase assets from the banking system. Some of these assets were U.S. Treasuries, some were riskier mortgage-backed securities, and some were guaranteed Federal agency debt. All of these newly purchased assets paid an interest rate, which contributed to the increase in Fed operating revenues and profits as it increased the money supply.
The $91bn of net income came almost wholly from interest earned on the securities the Fed holds ($80.5bn). The U.S. Treasury issues bonds which are bought by the Federal Reserve. (We should note that the Fed doesn’t buy these bonds directly from the Treasury, but only on the secondary market from favored dealers.) Interest paid on these bonds accumulates at the Fed as income, and at the end of the year the Fed distributes it back to the Treasury, less its operating expenses. Since the Fed held, give or take, about $1.6 trillion of U.S. Treasury securities over 2012, the government was essentially able to get a free lunch—any interest paid on these securities was an accounting fiction, as it was remitted back at the end of the year (less expenses). Normally the Fed only operates at the short end of the yield curve. This means that as a general rule the Fed only purchases short-term U.S. Treasury debt. Since shortterm debt is also the lowest yielding, some might say that the Fed is not really providing much of a free lunch. The big news during 2012 for Fed watchers was the expansion of its “Operation Twist.” With an increased focus on the long end of the yield curve, the Fed started purchasing bonds of longer maturity to keep long-term borrowing costs low. This was a savvy move that would help shield the Treasury from the effects of some of the Fed’s own policies. The Fed has the potential to increase inflationary pressures on prices through its monetary expansion. Since this inflation is not occurring now, but almost certainly will at some future date, only longer-dated securities will see their yields rise to account for their lost purchasing power. This would spell disaster for a Treasury that finances itself in part with longer-dated securities. By pledging to buy longer-term bonds, the Fed will artificially reduce their yields and thus mask the inflation premium building on their yields. Jan. 1, 2012
Jan. 1, 2013
Within 15 days
16 to 90 days
91 days to 1 year
1 to 5 years
5 to 10 years 660,486 862,403 Table 1: Maturity distribution of U.S. Treasury holdings of the Fed ($m)
While the Fed has slightly decreased the total amount of Treasuries held, Operation Twist has increased the average maturity of these holdings. The Fed currently holds almost no Treasuries with maturities under 1 year and has increased its holdings dated longer than 5 years by over $200bn. Even though the total amount of Treasury debt held has decreased, the total distribution to the Treasury has increased because of this maturity shift. By holding higher interest rate bonds of longer maturities, the Fed earns more interest, which results in more profit to remit to the Treasury at year end. As we review the Fed’s operations in 2012 we see the usual outcomes. The banking sector has benefited from its operations (unusually so, thanks to the continued interest on reserve policy) and the government has received a free lunch by having a ready buyer for its ever-increasing debt, especially long-term debt, which might otherwise be susceptible to inflationary pressures increasing its interest yield. Let’s see what surprises the Fed has in store for us in 2013. The Start of The Federal Reserve VIDEO BELOW http://www.youtube.com/watch?v=HBe3metBJFA&feature=player_embedded The Federal Reserve Fractional Reserve Banking Explained VIDEO BELOW http://www.youtube.com/watch?v=eWl7Mb49vSk
Private Prisons: The More Americans They Put Behind Bars The More Money They Make Michael Snyder Economic Collapse March 12, 2013
How would you describe an industry that wants to put more Americans in prison and keep them there longer so that it can make more money? In America today, approximately 130,000 people are locked up in private prisons that are being run by for-profit companies, and that number is growing very rapidly. Overall, the U.S. has approximately 25 percent of the entire global prison population even though it only has 5 percent of the total global population. The United States has the highest incarceration rate on the entire globe by far, and no nation in the history of the world has ever locked up more of its own citizens than we have. Are we really such a cesspool of filth and decay that we need to lock up so many of our own people? Or are there some other factors at work? Could part of the problem be that we have allowed companies to lock up men and women in cages for profit? The two largest private prison companies combined to bring in close to $3,000,000,000 in revenue in 2010, and the largest private prison companies have spent tens of millions of dollars on lobbying and campaign contributions over the past decade. Putting Americans behind bars has become very big business, and those companies have been given a perverse incentive to push for even more Americans to be locked up. It is a system that is absolutely teeming with corruption, and it is going to get a lot worse unless someone does something about it.
One of the keys to success in the private prison business it to get politicians to vote your way. That is why the big private prison companies spend so much money on lobbying and campaign contributions. The following is an excerpt from a report put out by the Justice Policy Institute entitled “Gaming the System: How the Political Strategies of Private Prison Companies Promote Ineffective Incarceration Policies“… For-profit private prison companies primarily use three strategies to influence policy: lobbying, direct campaign contributions, and building relationships, networks, and associations. Over the years, these political strategies have allowed private prison companies to promote policies that lead to higher rates of incarceration and thus greater profit margins for their company. In particular, private prison companies have had either influence over or helped to draft model legislation such as “three-strikes” and “truth-in-sentencing” laws, both of which have driven up incarceration rates and ultimately created more opportunities for private prison companies to bid on contracts to increase revenues. If you can believe it, three of the largest private prison companies have spent approximately $45,000,000 combined on lobbying and campaign contributions over the past decade. Would they be spending so much money if those companies did not believe that it was getting results? Just look at what has happened to the U.S. prison population over the past several decades. Prior to 1980, there were virtually no private prisons in the United States. But since that time, we have seen the overall prison population and the private prison population absolutely explode. For example, between 1990 and 2009 the number of Americans in private prisons grew by about 1600 percent. Overall, the U.S. prison population more than quadrupled between 1980 and 2007. So something has definitely changed. Not that it is wrong to put people in prison when they commit crimes. Of course not. And right now violent crime is rapidly rising in many of our largest cities. When people commit violent crimes they need to be removed from the streets. But when you put those criminals into the hands of private companies that are just in it to make a buck, the potential for abuse is enormous. For example, when auditors visited one private prison in Texas, they “got so much fecal matter on their
shoes they had to wipe their feet on the grass outside.” The prisoners were literally living in their own manure. How would you feel if a member of your own family was locked up in such a facility? And the truth is that there seem to be endless stories of abuse in private prisons. One private prison company reportedly charges inmates $5.00 a minute to make phone calls but only pays them $1.00 a day to work… Last year the Corrections Corporation of America(CCA), the nation’s largest private prison company, received $74 million of taxpayers’ money to run immigration detention centers. Their largest facility in Lumpkin, Georgia, receives $200 a night for each of the 2,000 detainees it holds, and rakes in yearly profits between $35 million and $50 million. Prisoners held in this remote facility depend on the prison’s phones to communicate with their lawyers and loved ones. Exploiting inmates’ need, CCA charges detainees here $5 per minute to make phone calls. Yet the prison only pays inmates who work at the facility $1 a day. At that rate, it would take five days to pay for just one minute. Speaking of work, private prisons have found that exploiting their inmates as a source of slave labor can be extraordinarily profitable. Today, private prisons are stealing jobs from ordinary American workers in a whole host of industries. The following is from an article by Vicky Pelaez… According to the Left Business Observer, the federal prison industry produces 100% of all military helmets, ammunition belts, bullet-proof vests, ID tags, shirts, pants, tents, bags, and canteens. Along with war supplies, prison workers supply 98% of the entire market for equipment assembly services; 93% of paints and paintbrushes; 92% of stove assembly; 46% of body armor; 36% of home appliances; 30% of headphones/microphones/speakers; and 21% of office furniture. Airplane parts, medical supplies, and much more: prisoners are even raising seeing-eye dogs for blind people. And many of the largest corporations in America have rushed in to take advantage of this pool of very cheap slave labor. Just check out some of the big names that have been exploiting prison labor… At least 37 states have legalized the contracting of prison labor by private corporations that mount their operations inside state prisons. The list of such companies contains the cream of U.S. corporate society: IBM, Boeing, Motorola, Microsoft, AT&T, Wireless, Texas Instrument, Dell, Compaq, Honeywell, Hewlett-Packard, Nortel, Lucent Technologies, 3Com, Intel, Northern Telecom, TWA, Nordstrom’s, Revlon, Macy’s, Pierre Cardin, Target Stores, and many more. All of these businesses are excited about the economic boom generation by prison labor. Just between 1980 and 1994, profits went up from $392 million to $1.31 billion. Inmates in state penitentiaries generally receive the minimum wage for their work, but not all; in Colorado, they get about $2 per hour, well under the minimum. And in privately-run prisons, they receive as little as 17 cents per hour for a maximum of six hours a day, the equivalent of $20 per month. The highest-paying private prison is CCA in Tennessee, where prisoners receive 50 cents per hour for what they call
“highly skilled positions.” At those rates, it is no surprise that inmates find the pay in federal prisons to be very generous. There, they can earn $1.25 an hour and work eight hours a day, and sometimes overtime. They can send home $200-$300 per month. But of course some of the biggest profits for private prisons come from detaining young people. Today, private prison companies operate more than 50 percent of all “youth correctional facilities” in the United States. And sometimes judges have even been bribed by these companies to sentence kids to very harsh sentences and to send them to their facilities. The following is from a report about two judges in Pennsylvania that were recently convicted for taking money to send kids to private prisons… Michael Conahan, a former jurist in Luzerne County, was sentenced on Friday to 210 months in custody by Senior U.S. District Court Judge Edwin M. Kosik II. Conahan was also ordered to pay $874,000 in restitution. [...] As Main Justice reported in August, Ciavarella, former president judge of the Court of Common Pleas and former judge of the Juvenile Court for Luzerne County, was sentenced to 28 years in prison and ordered to make restitution of $965,930. [...] Conahan’s role in the “cash for kids” scheme was to order the closing of a county-run detention center, clearing the way for Ciavarella, once known as a strict “law and order” judge, to send young offenders to private facilities. This arrangement worked out well for Ciavarella and Conahan, as well as the builder of the facilities and a developer, who pleaded guilty to lesser charges. The arrangement didn’t work out so well for the young offenders, some of them sent away for offenses that were little more than pranks and would have merited probation, or perhaps just scoldings, if the judges had tried to live up to their oaths. Are you starting to see why private prisons are such a problem? Hundreds of kids had their lives permanently altered by those corrupt judges. When you allow people to make money by locking other people up in cages, you are just asking for trouble. The more Americans they put behind bars, the more money these private prisons make. It is a system that needs to be brought to an end. So what do you think? Do you believe that private prisons are a good idea or a bad idea?
We recently looked at the Federal Reserve’s 2012 results. In particular, we pointed to some positive and negative developments. On a positiv...