A week ago President Barack Obama signed a new highway funding bill that will effectively tax banks and raid the Federal Reserve to pay for new highway spending. That whole ordeal exposed the convenient fiction that the Federal Reserve needs capital. The truth is, however that the Fed doesn’t need capital since it can just create money to pay anything it owes.
Now, several lawmakers on the House Financial Services Committee are trying to do the right thing. Reps. Bill Huizenga, R-Mich., and Steve Stivers, R-Ohio, with the support of Chairman Jeb Hensarling, R-Texas, want to give banks back most of the so-called stock they had to purchase when they joined the Fed.
When joining the Fed, banks are required to buy stock in the Federal Reserve System equal to 6 percent of their capital, with 3 percent held at the banks’ regional Fed (It’s been a requirement since 1913). Because this amount can no longer be used for any other purpose, the Fed pays the banks a 6 percent annual dividend.
Shareholders in a public company can trade or sell their stock, but that’s not the case here. So the amount is really more like a contribution.