Tuesday, March 16, 2010

The New U.S. Government Off Balance Sheet Scam

Senator Chris Dodd, who is not seeking re-election, has decided to treat the American people to one more scam, probably because scamming is all he knows how to do.

Here are the ugly details.

The Federal Reserve does not operate with funds that are the result of the congressional appropriations process. The Fed instead operates from the "profits" it generates.

Fed "profit" is generated by printing money out of thin air. It uses these out-of-thin-air funds to buy Treasury bills--although this has changed a bit during the financial crisis and they have also been buying other securities. Nevertheless, the interest they earn from buying these securities, with the money they print out of thin air, they consider "profit."

In other words, they can create as much "profit" as they want by buying securities with newly created money.

Apparently, Senator Dodd, who is chairman of the Senate Banking Committee, is on to this scam. As a parting attempt to bring some integrity to Washington is he going to shut this scam down? Not exactly. He is going to expand the scam by getting the Fed to "create" some profits for two new operations that will not show up on the books of the U.S. government.

WSJ explains:
It seems the Senate Banking Committee has discovered the advantages of what one might call off-balance-sheet financing. In the latest version of the financial-regulatory bill unveiled by Chairman Chris Dodd on Monday, the committee shifts the budgets of all financial consumer-protection activities from half a dozen federal agencies to the Fed -- and then makes explicit that the Fed would have little say over what the new consumer bureau, to be headed by a presidential appointee, would do.

Then there's a new Office of Financial Research to be established inside the Treasury to advise a new council of regulators. The Treasury budget, of course, is appropriated by Congress, but not this office.

The Fed would foot the bill for the next two years, then the Treasury secretary is to assess the largest financial institutions to cover the costs. "To the extent that the assessments...do not fully cover

the total expenses of the office, the [Federal Reserve] Board of Governors shall provide to the office an amount sufficient to cover the difference," the Dodd bill says.
Bottom line, Dodd has opened a major new avenue for scamming. It is a very complex method to hide the simple fact that the Fed will be required to print money to finance parts of government operations. It is a highly inflationary method, and now that Dodd has shown Congress the way, one wonders how many other programs in the future will be financed in this very destructive way.

Dodd just managed to get himself on my evil bastard list.


  1. I must presume this is posted here as an example of fruitcake propeller-head PhD's and goof-ball nutty-economists with nothing better to do with their grad students, SPSS and StatPak programs.

    Indeed, this is an excellent example of how correlation is not causation. Believe me, when the (Dead)skins are doing poorly (like for the past several seasons), there is no lack of opportunity for bureaucrats and lobbyists to co-mingle in the DC environs.

  2. Dang, those little MBA and post-doc staffer cretins on the Hill sure are earning their pay these days! I wonder how many of them wrote thesis papers entitled "Creative Destruction: New, Complex Ways to Solve Old, Simple Political Problems and Bring A Country To Its Knees In An Orgy Of Corruption And Fraud Along The Way"?

  3. As Arnold Kling would say, the Fed is no longer acting like a central bank, but a piggy bank.

  4. I believe Anonymous is mis-interpreting the work by Bentley Coffey, Patrick A. McLaughlin, and Robert D. Tolison(CM&T). Dodds bill is a legislative action and their study stated explicitly that there was no correlation between Redskins and congress. So this Bill does not prove there is no causation here.

    In fact, since legislation is required before new bureaucratic action can begin, it will be interesting to note any improvements in Redskin success if the Bill passes. At that point CM&T suggests we all do whatever is necessary to defeat the Redskins if we favor smaller bureacracy. POWER TO THE MANNINGS!