Federal Reserve Needs to Put. The Money. Back.

One of my favorite moments from the great Gene Wilder – rightly honored after his recent passing – is a scene in “Young Frankenstein” where he and Teri Garr stumble upon a secret passage-way in the elder Frankenstein’s castle. When she takes a candle out of its holder, Wilder is instantly trapped. He gives Garr the obvious directive that she needs to “Put. The candle. Back.”

Wilder’s gift for deadpan humor was so successful that he became one of the internet’s most enduring memes for sarcastically stating the obvious, even though he hadn’t been active in film for years. And it is in honor of his legacy, while looking toward our nation’s future prosperity, that I borrow his catch-phrase in telling the Federal Reserve …

Put. The money. Back.

To fulfill its three-fold mandate – maximize employment, stabilize prices and moderate long-term interest rates – the Federal Reserve has deployed almost every weapon in its arsenal to target economic growth since the financial markets cratered in 2008.

Regrettably, with the economy crawling along at a meager 1.2 percent growth rate, we must conclude that these weapons are not hitting their targets (or at least nowhere near the bull’s eye).

So it’s time for the Fed to take the one step it hasn’t: Give the banks back their money.

As part of its charter more than 100 years ago, the Federal Reserve system is required to wall off 6 percent of total assets to buy shares in the 12 regional reserve banks that comprise our central banking system. However, this stock is very different from stock in a private company. The stock may not be sold, traded, or pledged as security for a loan, and dividends are limited to 6 percent, a particularly unambitious ROI. This stock is more like paying tribute to some feudal lord than buying a Golden Ticket to prosperity.

As a result, the banks that pay into this system can’t lend this money to the economic drivers of our country, like first-time homebuyers or aspiring small-business owners. It’s just stuck there, the financial equivalent of a mad scientist’s grandson trapped in a secret passageway.

What’s more, there is an actual cost to locking this money up. In exchange for buying shares in the reserve banks, the Fed must pay an annual dividend to each bank based on the size of its total assets. For the biggest, the average dividend payment is about $110 million a year. In 2015, Fed dividends totaled $1.7 billion.

It’s much better for the economy and everyone involved if banks were free to put this capital to work, lending to the people who buy homes, build businesses and invest in their communities. After nearly a decade of the American economy teetering on the cusp of another recession, policymakers must free this capital so banks can invest it in the broader economy.

While the wealthy will always be insulated from economic instability, the working classes haven’t even come close to recovery from pre-2008 levels. They need access to their regional bank’s liquid capital to move forward.

Compounding the problem, Congress last year redirected a big share of the money the Federal Reserve owes these banks to finance the latest highway bill – carving money from the dividends by an amount tied to yields on 10-year U.S. Treasuries plus a one-time draw of $19 billion. This is part of Washington’s perpetual efforts to hide the true costs of government spending.

Now road-building can be a laudable government investment, but this financing scheme marked the latest example of Congress taking money promised to one group for something entirely unrelated, a troubling pattern that continues to erode the financial stability of Social Security and other federal programs from which Congress frequently “borrows.”

When the issue of raiding the Fed’s dividends arose last summer, Senate Banking Committee Chairman Richard Shelby (R-Ala.) told the Wall Street Journal, “This will weaken the banking system. There’s no connection between small banks, medium-sized banks, and building highways and transit.”

Even Fed Chairwoman Janet Yellen has expressed some concern about reducing these dividend payments in order to finance more spending by Congress, specifically citing those smaller banks that rely on these dividend payments.

“This is a change to the law that could conceivably have unintended consequences,” she told the Senate Banking Committee last July. “It deserves some serious thought and analysis.”

That note of caution from the Fed chair should make everyone sit up and take notice. One of the consequences could be some state-chartered banks leave the Federal Reserve system in favor of a system overseen by the Federal Deposit Insurance Corp.

When the Federal Reserve was created in 1913, this system probably made sense, but it doesn’t in the modern economy. Confiscating funds from regional banks into a cumbersome, ineffective national system hinders growth and reinforces distrust of the Fed, especially when those banks’ money gets pick-pocketed by Congress.

This era of historically low interest rates has proven the limits of manipulating monetary policy to revive a shaky economy. Wouldn’t it be better to unleash money the banks already have at their disposal to make direct investments in future growth?

So again I ask the governors of the Federal Reserve. Put. The money. Back.


Jared Whitley is a veteran of politics and journalism, having worked for the Senate, White House and myriad news outlets. This year he won the Best in the West competition for column writing.

Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Submission guidelines can be found here.

Morning Consult