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Ed Feulner

Faking People Out at the Fed
By Ed Feulner
Sep 25, 2015 - 1:35:32 AM

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Frustrated voters sometimes denounce their representatives as "good for nothing," but are they being fair? Consider the budget gimmicks some politicians come up with. When it comes to fiscal gymnastics, who can deny their creativity?

Case in point: a plan to fund the mismanaged Highway Trust Fund by tapping the dividends that the Federal Reserve pays member banks. Seriously, stick with me here, because this is a doozy.

Here we have federal highway spending, operating at a deficit. Duh, it's run by politicians. Of course they're spending more money than the Fund takes in. And they've been doing it since 2008.

Even in Washington though, you can do that for only so long before you have to find real money. So this past summer both houses of Congress came up with a plan. The Senate bill covered a much longer time frame (six years versus five months), and so it had a bigger price tag ($47 billion versus $8 billion). But both were chockful of tax hikes and budget tricks. So far, so Washington.

The kicker though, was the way they planned to come up with at least some of the money. As a condition of joining the Federal Reserve System, member banks are required to buy into the stock of their district Fed bank. In return, the Fed pays the banks a 6 percent dividend every year.

The Senate plan? Cut that 6 percent to 1.5 percent. Take the difference and put into the highway fund. Problem solved! Okay, not solved, but, uh, sorta taken care of. For now.

You may be wondering what banking has to do with transportation spending. Good question, but don't waste time trying to find a link; there isn't one. When lawmakers need some bucks, they pull from wherever they can.

And in this case, they've got to feel like geniuses. I mean, bankers? Boo hiss, right? It's hard to drum up sympathy for anything close to Wall Street. But it's not that simple.

For one thing, it's not as if the banks can do anything with this stock. It's a condition of membership. They can't buy or sell it, the way most stockholders can.

This so-called ownership is really just nominal -- the Federal Reserve Board of Governors runs the system, and it's a full-fledged government agency. "Lowering the dividend isn't going to punish an evil cabal of bankers," writes financial regulation expert Norbert Michel in Forbes. "Because that particular cabal doesn't really exist."

Michel goes on to explain that all the profits from the Fed's operations, by law, must be turned over to the U.S. Treasury. And it really adds up: For the last 10 years, the Fed has annually remitted between about $19 billion (in 2004) and $88 billion (in 2012).

"So the Fed is a significant source of revenue for the government," Michel writes, "and now some members of Congress want more." No matter how you slice this, it amounts to taking money out of the Fed to pay for more pet projects rather than cutting spending. "Taxpayers would ultimately foot the bill," Michel notes. That's right. Taxpayers. Hard-working Americans like you and me.

And lawmakers like the idea of tapping the Federal Reserve Fund so much that even if they don't use it to shore up the Highway Trust Fund, there are reports that they may do it to finance other deficit spending. So there you have it. That good-for-nothing Congress, taking the old tax-and-spend policy we've seen for decades and giving it a twist.

We always knew they were good at wasting our tax dollars. Now they're proposing a gimmick that may even convince us it's not our money at stake.

It's time to speak up -- and tell them how wrong they are.

Ed Feulner is founder of The Heritage Foundation (

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