Call it a victory for the banks and a defeat for the Fed, or a "sleight-of-hand" maneuver, as former Fed Chairman Ben Bernanke does. It's the House transportation bill, passed last week, which uses funds from the Federal Reserve's capital account to help fund highway construction. A Senate version, which passed in late July, would have cut interest payments from the Fed to the banks instead. (These two versions have to be reconciled in conference.)
In his latest blog, Bernanke explains why the House plan is not on the up-and-up.
The Fed regularly transfers all the interest it earns on its portfolio of securities, minus operating expenses and interest paid on liabilities, to the Treasury, says Bernanke. And the numbers are huge: nearly $500 billion over the past six years, which is applied to the budget deficit, easing the burden on taxpayers. The Fed's capital account, now at $29.3 billion, acts as a buffer to absorb any losses on the Fed's portfolio and smooth over payments to the Treasury.
Therefore, drawing on the Fed's capital account does not increase revenues for the government because the money would have gone to the Treasury anyway, writes Bernanke, noting that it could, however, increase budget deficits.
This strategy could increase revenues only if Congress required the Fed to reduce its capital, writes Bernanke. In that case the Fed would need to sell some of the government debt it owns and give the proceeds to the Treasury. But then, writes Bernanke, the Treasury would no longer collect interest on those securities –- interest that would have previously gone to the Treasury.
Bernanke calls on "legislators who care about the integrity of the budgeting process" to withhold support of the House bill.
