What do you know about the Fed? A Quiz.

Discussion in 'Economy' started by Sundial, Mar 26, 2012.

  1. Sundial
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    Sundial Class Warrior

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    1. The Fed is owned by:
    a) US commercial banks
    b) the American people
    c) George Soros

    2. The Fed is controlled by:
    a) US commercial banks
    b) the government
    c) the Jews

    3. The Fed owns what percent of the national debt:
    a) less than China
    b) more than China
    c) China

    4. The Fed generates:
    a) a loss
    b) a gain
    c) Ron Paul

    5. The Fed:
    a) paid $80 billion to the US Treasury last year
    b) was paid $80 billion by the US Treasury last year
    c) both (a) and (b)
     
  2. DSGE
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    DSGE VIP Member

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    There don't seem to be any spoiler tags for me to wrap this in....

    1) Well commercial banks that are part of the Federal Reserve System are obliged to buy equity in the Fed. That's so that the Fed has capital in case it takes a loss on its balance sheet. Banks are entitled to I think a 6% return on equity.

    2) Discount rate, reserve requirement and interest on reserve decision are made by the Board of Governors, all of who are appointed by the President and confirmed by the Senate. Monetary policy decisions are made by the FOMC, of which 5 Regional Reserve Bank presidents (who are elected by member commercial banks) serve on a rotating basis and 7 Board of Governors members form a voting majority. So I guess the answer is "the government" except the executive branch isn't allowed to order the Board of Governors around. The government appoints the people who make the final decisions.

    3) If I recall, it owns about $1.6 trillion in treasuries. I don't know how much China owns.

    4) A gain, normally.

    5) Paid $80 billion to the Treasury.
     
  3. Sundial
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    Sundial Class Warrior

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    1. You're right - though the concept of the Fed needing equity is a tricky one. Since Federal Reserve notes are legal tender.

    2. Yes, exactly right.

    3. China owns less.

    4. The Fed trades its own liabilities, which earn little or no interest, for higher-earning US debt. Hard to lose money that way.

    5. The US pays interest to the Fed on the bonds the Fed owns, and then the Fed pays it back to the Treasury.
     
  4. DSGE
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    DSGE VIP Member

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    It's hard to have a negative stream of earnings, but you can take a hit to your balance sheet position. This happened last year to the Reserve Bank of Australia. They took in about $0.9 billion in interest payments, but there was big shock to the value of their foreign reserve holdings which made them take about a $5 billion loss on their balance sheet.

    Like you said, the whole balance sheet thing is tricky though because they don't really have any solvency constraint since they can print money.

    Good point. Although the Fed has holdings other than US Treasuries. It earns interest on MBSs, discount loans and currency swaps too. So while lots of the $80 billion remitted to the Treasury would have just offset the interest payments, the Treasury did get some profit.
     
  5. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    We know that the Fed buys 60% of all recently issued Federal debt thus hugely distorting the economy, our perception of the debt, and the cost of money throughout the economy. We can only pray that the worst result will be slow growth rather than Depression.

    Also, I suspect the OP was designed to be critical of the Fed, but there was no direct criticism because the poster lacked the knowledge to do it.
     
    Last edited: Mar 28, 2012
  6. DSGE
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    DSGE VIP Member

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    well if that isn't the world's dumbest pot calling the kettle ignorant. [​IMG]
     
  7. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    of course if there was ignorance the liberal would not be so afraid to point out where it is? what does your fear tell you?
     

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