Will Janet Yellen Rather Protect Big Banks, or the Fed?

By David Dayen, a lapsed blogger. Follow him on Twitter @ddayen

The House-Senate conference on the highway bill represents a choice, with the Federal Reserve pitted against the big banks that partially own them. It’s not a choice we should have to make; the highway trust fund has a shortfall because we haven’t raised the user fee on roads, i.e. the gas tax, in over 20 years, and the severe antipathy to taxes of any kind left Republicans to hunt around the couch cushions for an alternative. So we are where we are now. And this choice between big bank profits and central bank independence is firmly in the hands of Janet Yellen.

Yellen, you see, was the one who decided to speak up and protect the big banks, when an egregious, 100 year-old subsidy became the best alternative to filling the highway bill’s shortfall. As Yves wrote in July:

Budgeteers have woken up to the fact that banks get a difficult-to-justify perk from membership in the Federal Reserve system, that of getting 6% annual dividend on the preferred stock that they bought at the time they joined. A draft bill by Senate Majority leader Mitch McConnell includes a provision that would cut the dividends to member banks with more than $1 billion in assets from 6% to 1.5%. He’s proposing to use it to help shore up the highway trust fund […]

But Fed chairman Janet Yellen did her turn as a bank lobbyist. She can’t take up the claim that this change would increase systemic risks, since the central bank runs stress tests on the biggest institutions and can simply require any that might fall short to lower their dividends to strengthen their capital levels. Instead, she throws out the strained argument that cutting this subsidy would hurt the Federal Reserve system […]

“This is a change to the law that could conceivably have unintended consequences,” Ms. Yellen said while testifying before the Senate Banking Committee on Thursday. “And I think it deserves some serious thought and analysis.”

This was a victory for ideology over reality. The only consequence of removing a risk-free 6% subsidy (which is tax-free for banks like JPMorgan and BofA who’ve been around before 1942) was that they’d have to find some way to earn profits instead of having them handed to them. There is simply no upside to leaving the Fed system: nationally-chartered banks must be members, and state-chartered ones must abide by the conditions of membership anyway. They get access to Fedwire and the discount window and all sorts of other perks, and they don’t need to double their stock purchase every 17 years as an extra incentive.

Yellen’s remarks really mattered. In Bloomberg’s tick-tock over how Wall Street lobbyists killed the bank subsidy in the House, they note that they quoted Yellen’s statement repeatedly to lawmakers. It was a central part of their strategy.

But Yellen should have been careful what she wished for. Because instead of cutting the bank subsidy, Wall Street’s finest in the House swapped it out with a different pay-for: eliminating the Fed’s capital surplus account. I wrote about this a week or so ago:

That’s essentially the Federal Reserve’s reserve fund, used to absorb temporary losses when the central bank adds to its balance sheet. Without a loss buffer, the Fed could show losses on its balance sheet, prompting cries of insolvency from Tea Party types. This could nudge the Fed to undesirably focus on making money to cool the political heat instead of doing what’s best for the economy. It’s a stealthy way to undermine the central bank.

It’s also a massive budgetary gimmick. The Fed already remits earnings from its balance sheet to the Treasury Department annually. This liquidation — with the Fed selling off interest-bearing assets — would reduce future earnings, just like cashing out your savings account eliminates future interest gained. But because Fed remittances aren’t on budget, it appears like it raises money. A 2002 Government Accountability Office report explains that reducing the capital surplus account creates phantom revenue for budget accounting, but would “not produce new resources for the federal government as a whole.”

Liquidating the account does take away one of the Fed’s tools to conduct monetary policy. In fact, the main policy tool it has left to ensure a particular interest rate involves paying banks interest on their excess reserves, a payment that’s already at $6 billion a year and will subsequently grow higher as rates rise. So not only did the amendment protect one big bank subsidy, it facilitated the continuation of an even bigger one.

Yellen did all that work and put her reputation on the line to protect the banks from harm, and what’s the payback? A stealth attack on the agency she chairs.

What’s interesting is that Yellen hasn’t said a word since this came down, even though it’s an open question what will happen. The Senate version lowers the bank subsidy and the House version cuts the Fed surplus account. There’s a conference committee that has to come up with a final bill by the end of the week, when highway funding authorization expires. Yellen weighing in, just as before, could make a difference. But she’s kept her trap shut.

Her predecessor, Ben Bernanke, called the surplus account nixing “a budgetary sleight-of-hand.” The sober centrists at the WaPo editorial board termed it a raid on the Fed. Yellen’s own vice chair, Stan Fischer, said it would be dangerous to use Fed funds as “quasi-fiscal policy.” (Let me state clearly that I don’t agree, mainly because the Fed already remits the money; this is just a shift from an undefined to a defined transfer.)

But Yellen hasn’t made a peep, with just days to go before the decision gets made. She could hide behind the fiction that the Fed chair shouldn’t get involved in legislative matters; but of course she had no problem doing that when the bank subsidy was threatened. You have to conclude that she would rather allow the weakening of the institution she runs than allow banks to use some of the government dole they benefit from.

I mean, it’s a clarifying moment at least, right?

UPDATE: Congress looks set to pass a two-week patch to extend the deadline out to the first week of December. Giving Yellen all the more time to weigh in.

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. 1 kings

    This is satire, yes? The answer is both of course. Have you not been listening the last 10 years. The banks ARE the government.
    And have serious problems with ‘we have highway fund shortfall’. Am sure we can assume that ‘legislators’ are ‘borrowing'(stealing) from the fund to fund whatever else they deem.
    Remember the slogan, “Government is Evil”, pass the cash.

  2. financial matters

    This seems like a good time to take a good look at the Feds’ balance sheet before it commits more legal tender to dicey products.

    It will be very tempted in the next liquidity crunch to rescue financial products if their balance sheet remains obscure.

    This 6% dividend on public money creation should be recycled into the public good which would not seem to include JP Morgan.

    The Fed should be oriented towards the public good rather than banks and should focus on living wage employment rather than the stock market.

    “”Keynes’ term “socialization of investment” was largely used to refer to public investment that would simultaneously create jobs and also increase the capacity of the economy to improve living standards. Further, he consistently argued that the measure of success of policy is job creation, not “economic growth” (Tcherneva 2008).”” Mission Oriented Finance

  3. fresno dan

    Fascinating analysis! Much appreciated.
    If this doesn’t prove that the FED regulates the people, and protects (enriches actually) the banks, than I don’t know what would…

  4. craazyboy

    The Fed operating surplus is going away anyway. As their portfolio gets rolled over at the ridiculous low rates they engineered, their operating revenue is soon going to ZIRP. Combine that with paying interest on bank reserves to raise interest rates??? A few years ago I calculated the Fed could raise rates to maybe as high as 3% if they were to use the then $100B surplus they were turning over to the treasury. With 5 year bonds now returning a percent something, the revenue ain’t gonna be there. I know how that works, being a ZIRP recipient for 7 years. You become dependent on banker lobbyists to pick up your bill at nice restaurants! [We don’t have any bank lobbyists in my area – I’ve been considering printing my own money]

    1. Jim Haygood

      Quite right. A 2013 paper by Fed staffers Carpenter et al already prepared the ground for ‘deferred asset’ accounting (page 13) when the Fed stops remitting profits to the Treasury:


      Liquidating the Fed’s capital surplus account just makes it more leveraged. We’ve already seen what happens when 535 mental dwarves play games with hyper leverage: to wit, the blowouts of Fannie Mae and Freddie Mac, which still haven’t been fixed.

      Now the Capitol Hill amateur financiers want to move on to bigger prey, to accomplish (as poor old Dim used to say in A Clockwork Orange) ‘a man-sized krast. Huh huh, yeah!’

      This ought to be comical.

  5. jgordon

    There’s a more interesting point here that should reinforced: when the Republicans failed to raise taxes–there being much lamentation over this amongst the left–“searching the couch cushions” produced hitherto unremarked upon and particularly egregious bit of waste to cut.

    Though not that there is any “waste” per se. I suppose the Federal Reserve and congress could just start the printing presses and start handing out fiat money to every entrenched special interest in the constellation. That way none would have any reason to grumble about not getting their fair share and everyone would be happy. Just print and shovel money at all who are well-connected forever in ad infinitum. And if the economy starts heating up a bit too much, raise taxes then. Dang the beauty of this monetary philosophy truly makes my head spin. What could go wrong?

  6. susan the other

    Janet is sticking to her mandate. There is only one Fed mandate (they’re just kidding about full employment) and it is to maintain a strong dollar. They actually use unemployment to do that in case you haven’t noticed their maneuvers. And an infrastructure project to fix highways would screw up their precarious artificial balance. In the Fed world everything could go south fast if the dollar looked weak. This standoff isn’t surprising. Asset value must be maintained to assure a strong dollar and a strong dollar reciprocates – it’s as circular as it is pointless. Money is debt; ergo debt is fiat; and if gold is money, gold is fiat too – so that only leaves the exchange rate (blind faith) to hold the dollar and assets up and if we go spending money like it was ours the bizarre valuation of money will be exposed. And nobody will need the Fed system at all.

  7. Tim

    Technically, state chartered banks don’t need to be Fed members for Fedwire access or FDIC insurance. Back in the 1930’s the original Glass Steagall DID require Fed membership for FDIC insurance but that provision of the law was repealed in 1939.

    In fact as they FDIC has increased supervision of non FED State Chartered Banks the perceived need for Fed membership has been decreased.


  8. WanderingMind

    Let’s take a look at this from an MMT perspective.

    The argument regarding the highway bill seems to be based on the assumption that the money to pay for highway improvement “has to come from somewhere” (i.e. taxes, cuts in other expenditures or borrowing).

    Thus, the competing proposals to either raise the highway tax or shift the dividend income otherwise payable to the banks into the highway fund.

    This is a false choice. As all who have spent any time here should know by now, the U.S. government does not need to raise taxes or borrow in order to fund its operations. Taxes have a different purpose.

    In fact, at this point the central government should be spending more money, on a net basis, not less. I.e. the deficit should be larger. So, raising taxes in order to “pay for” highway improvements is a net neutral for the economy as a whole, when what the economy needs is the federal government adding money to the economy via fiscal policy.

    Alternatively, shifting the money now paid to the banks as a dividend to the highway fund probably has a similar neutral effect, on the assumption that the 6% dividend gets spent in the economy now and it will just be spent in a different part of the economy after it gets shifted to the highway fund. (It is in fact probably a net positive for the economy because at present the 6% dividend is going into the hands of people who don’t spend it on productive stuff).

    The next part of the post I have a problem with is on the discussion regarding the Fed’s balance sheet. Normal balance sheet analysis does not apply to an entity whose liabilities are the best money in the U.S. economy and which can create as many of those liabilities as it wants/needs to.

    Yes, it looks bad if the fed is reducing what appears as reserve cash on its balance sheet, but the Fed creates cash, just like other central banks. It can completely destroy what appears to be its equity and it will have no effect on its ability to spend more dollars. It has infinite ability to create dollars and that ability is not impacted by the apparent deterioration of its apparent equity.

    So, the underlying basis for this post is flawed, in my opinion.

  9. financial matters

    True. It’s a question of how much fiscal authority we want to give the Fed.

    It starts to get out of the box when they add questionable assets to their balance sheet.

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