CONGRESS: THE BUCK NEVER STOPS HERE
The desk sign motto in President Harry Truman's White House office was, "The Buck Stops Here."
That motto is a cornerstone of representative government. The people must know who is responsible for decisions in order to hold them accountable for the results, and to adjust their political support accordingly. Accountability creates political incentives for good governance and disincentives bad governance. It requires transparency. Justice Louis D. Brandies observed that, "Sunshine is said to be the best of disinfectants," whereas obfuscation is the handiwork of knaves and the cradle of fraud, waste, and abuse.
This is prologue to critiquing the tireless efforts by Congress to escape political accountability by flipping President Truman's motto to read, "The Buck Never Stops Here." Congress chronically employs Harry Houdini-like accounting tricks that mystify voters to hike spending without a commensurate increase in revenues--the very definition of a free lunch. Exemplary is recent legislation that spends money for highways by slashing the "Fed Dividend," a term as foreign as cuneiform to ordinary voters.
It was created in 1913 when the Federal Reserve System was created. Its purpose was to encourage bank membership in the Fed which was needed legally to authorize its regulation of the money supply and bank safety by controlling bank reserves.
The Fed Dividend works as follows. As a condition of joining the Fed with its many financial benefits, banks must purchase "shares" in one of 12 Regional Federal Reserve Banks equivalent to six percent of their total paid-up capital stock and surplus. Half of the price is paid up front, and the remainder is held as a cash reserve. In exchange for the share purchases, the banks receive a Fed Dividend annually based on the amount of their paid in capital to the Regional Reserve Banks. It totaled $1.7 billion in 2015.
The Fed Dividend should be abandoned as obsolete, superfluous, and inequitable. This can be achieved effortlessly by ending the mandate that Fed member ranks purchase shares in Federal Reserve Banks. With no share ownership there would be no dividends to pay. And with no requirement to purchase shares, banks would have more money to loan to stimulate the economy.
The purchase requirement was imposed in 1913 because it was then constitutionally necessary to enable federal regulation of the reserves of depository institutions, a key instrument in regulating the money supply and influencing interest rates. The Supreme Court had issued a series of opinions narrowly interpreting the power of Congress to regulate private businesses directly under the Commerce Clause. But these decisions were overruled 80 years ago. Under the modern interpretation of the Commerce Clause, Congress has subjected the reserves of all depository institutions to federal regulation whether or not they are Fed members in the Depository Institutions Deregulation and Monetary Control Act of 1980. Moreover, the Fed and the Federal Open Market Committee regulate the money supply and nudge interest rates through open-market purchases of securities, the discount window, or emergency lending programs. The Fed Dividend as a money supply or interest rate tool is superfluous. Its epitaph should be written by ending the obligation of banks to buy shares in Regional Federal Reserve Banks.
But Congress has thrown a spanner in the works. It constantly searches for accounting gimmicks impenetrable to the public to justify otherwise unjustifiable spending. In this instance, Congress enacted legislation last year to add $7 billion over the next ten years in highway spending by lowering the Fed Dividend from 6% to approximately 2%. But the jump in spending will be politically painless because virtually no bank customers will know Congress has in substance taxed them to favor highway users or contractors. This is the dynamic and obfuscation that has created a prodigal $4.3 trillion annual budget and a $20 trillion national debt.
It's time for Congress to cease accounting acrobatics, end the Fed Dividend, and make highway users pay their way.