As usual, he only gives you partial information. This enables him to put a positive spin on what is happening.
In an interview with Bloomberg News, Warren Buffett calls the US Federal Reserve the greatest hedge fund in history and notes approvingly that the Fed is now contributing $80-$90 billion a year in securities profits to the Federal Budget.
Well yes, but let’s look a little deeper into this.
The Fed creates new money out of thin air and uses it to buy bonds from banks and other financial institutions. News stories always refer to this “bond buying” but almost never mention where the money came from to buy them. Banks and other financial institutions turn right around and buy bonds from the government. The Fed may then buy those bonds back.
It is illegal for the Fed to buy bonds directly from the government, since the Fed is the government and would be buying bonds from itself. But by using this indirect method, the government is able to circumvent the law and indirectly buy bonds from itself.
The Fed gets to keep the interest on the bonds purchased. This interest of course comes from the government or government affiliated entities and is then recycled back to the government minus Fed expenses. Fed expenses by the way are much bigger than before because of the new Consumer Protection Agency that is now housed inside it. By placing the agency inside the Fed, it can have an unlimited budget and operate without any Congressional budgetary oversight. This clearly violates the Constitution, but the Supreme Court has ruled that even a bank lacks “standing” to sue about this unless the bank can show financial hardship to itself.
So now you know the source of the $80-$90 billion that Buffett is talking about. Most of it comes from the government borrowing from itself and paying itself the interest.
But there is still more to the story. Interest rates have been rising despite the Fed’s best efforts to keep them down. As interest rates rise, bonds lose market value. So if the Fed’s bond portfolio were ” marked to market,” there would be a loss that is bigger than the $80-$90 billion in interest income. In effect, there really isn’t any income to contribute to the government. How does the fed solve this problem? It’s easy. It dispenses with honest accounting and keeps the value of its bond portfolio at the original purchase price. Wait a minute. Didn’t Fed chairman Bernanke want banks to “mark to market” their bonds before and during the Crash? Well yes, but it’s the Fed. It doesn’t have to walk its own talk.
Even so, there are signs that the Fed is worried about the losses it is racking up in its bond portfolio. If it ever sold those bonds, it would have to recognize the losses. It would then in all likelihood turn out to be insolvent. What to do about this? Why of course, just shift any losses onto the Treasury, that is, the taxpayers. That is exactly what the Fed has attempted to do through a note in Statistical Release H 4.1 dated January 6, 2011. Is this legal? No, it violates the Constitution, which requires Congressional approval of any public spending. But so far Congress does not seem to have noticed, much less objected.
For more information about all this, see Free Prices Now! (Fixing the economy by abolishing the Fed).