An expanded version of this article can be found at Law & Liberty

The funding scheme for the Consumer Financial Protection Bureau (CFPB) has been a source of controversy since its creation by the Dodd-Frank Act. The Supreme Court’s recent decision affirmed the constitutionality of “allowing the Bureau to draw money from the earnings of the Federal Reserve System.”

The Court’s decision has a fatal problem: while the Dodd-Frank Act funds the CFPB from the Fed’s earnings, today there are no Fed earnings. The Fed is losing money at the rate of more than $1 billion per week and has not had a penny of earnings since September 2022; it has instead accumulated the staggering sum of $172 billion in cash losses.

Section 1017 of the Dodd-Frank Act provides:

—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 [CFPB] Director to be reasonably necessary . . . . [emphasis added]

The Fed stopped sending distributions of its earnings to the U.S. 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. Sending nonexistent earnings to the CFPB violates the clear language of the Dodd-Frank Act.

Under standard accounting rules, the Fed has negative retained earnings, negative capital, and is technically insolvent. Today, the Fed borrows to cover its own and the CFPB’s expenses, primarily in the form of member bank deposits. Under the provisions of the Federal Reserve Act, these deposits are unsecured obligations of the 12 individual privately owned Federal Reserve Banks and are not guaranteed by the federal government. The Reserve bank deposits used to fund the CFPB are neither “public money” nor “drawn from the Treasury.”

Under current conditions—conditions that the framers of the Dodd-Frank Act never imagined possible—Fed payments to the CFPB conflict with the clear provisions of the Dodd-Frank Act and the Federal Reserve Act. As long as the Fed continues to suffer operating losses, the CFPB is not being funded with Federal Reserve earnings or “public money drawn from the Treasury.”

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