Diary

Letting Free Enterprise Work with the Fed Dividend

Congress always seems to be manipulating the system to find new and creative ways to spend more money.

Last December, congressional leaders used some eleventh-hour sleight of hand to redirect money owed to the banks to help finance more federal transportation spending.

The legislation dramatically reduced dividend rates the Federal Reserve pays banks, known as the Fed dividend, for locking up a significant share of their assets in the Fed’s 12 regional branches.

Some background on the arcane system: Banks are required to commit 6% of their overall assets to buy shares in the 12 regional Fed banks – 3% in so-called “callable” assets that the banks have to keep on their own books and another 3% locked up in the banks themselves.

The Fed is currently required to pay that money to the 60 or so biggest banks each year. But it would be better for everyone, if Congress would free up the money banks have to pay into the system.

By adjusting that formula ever so slightly, Congress can unlock the 3% tied up in the Fed banks, saving the federal government more than $1 billion and injecting more capital into the economy.

If Congress is really intent on creating local investment, and not just for transportation, they should let banks use that money as collateral for loans.

The move would raise $1.1 billion for the federal government over the next decade, money that could be used to reduce the national debt or give relief to tax payers.

This minor adjustment in the banks’ accounting rules could have a much more profound impact on their ability to lend money, because every dollar banks are allowed to keep on their own books could represent as much as $10 in future loans.

That is money that banks can use to lend to aspiring homeowners and small-business owners looking to expand.

Banks will still be required to dedicate 6% of their total assets to shares in these Federal Reserve banks – shares the banks can’t trade and don’t change in value – but it will be on their books instead of tied up at the Fed.

And let’s face it: When will the Fed ever actually need this money? A bank that prints its own money doesn’t rely on existing capital as much as the community bank down the street which cherishes every $1 deposited there.

There are very few win-win situations in Washington. This is one of the few.