Below is an excerpt of an important column by my friend Alex Pollock that appeared in the NY Sun:
The Federal Reserve cannot legally fund the Consumer Financial Protection Bureau now, because the Fed has no earnings and no retained earnings.
The Supreme Court may have recently affirmed the constitutionality of the bureau’s statutory funding provision “allowing the Bureau to draw money from the earnings of the Federal Reserve System,” as the Court wrote. That, though, does not change the fact that since there are no earnings, there is nothing from which to draw.
The Dodd-Frank Act provides: that each year “the Board of Governors shall transfer to the Bureau from the combined earnings of the Federal Reserve System” the amount determined by the bureau’s director “to be reasonably necessary….” The emphasis was added by the Sun.
The fatal fact for the CFPB is that the Dodd-Frank Act funds the bureau only from the Fed’s combined earnings. The problem is that currently there are no such earnings and instead the Fed is suffering spectacular losses. The combined Federal Reserve has reported losses so far this year at the remarkable average rate of about $7.8 billion per month and has not had a penny of earnings since September 2022.
It has instead accumulated the hitherto inconceivable deficit of $179 billion in operating losses. These losses have wiped out the Fed’s retained earnings of a mere $6.8 billion, leaving real retained earnings of a negative $173 billion, not to mention having also wiped out the Fed’s total paid-in capital of only $37 billion.
The Democratic majority that passed Dodd-Frank on a party line vote in 2010, knowing that it was likely to lose the congressional elections of later that year — as it did — longed to evade having its legislative child, the CFPB, disciplined by the power of the purse of a future Congress.
So it decided to find a way to exempt it from needing any future congressional appropriations. The then-majority’s trick to achieve this was to provide in the statute that the CFPB would get a share of the Federal Reserve’s earnings each year, instead of having to get appropriations from the Congress.
At that point, it was easy to assume that the Fed would always have earnings into which the CFPB could dip. The Fed had been profitable for almost a century. Who in 2010 expected that the Fed would ever show a loss of $179 billion? Nobody at all. Yet the losses continue to mount up.
The Federal Reserve properly stopped sending distributions to the American Treasury in September 2022 because it had no earnings to distribute. It should have stopped sending payments to the CFPB at the same time for the same reason. The Fed is not authorized to send nonexistent earnings to the CFPB or the Treasury.
Read the full article here.