Posted by: John Gilmore | September 16, 2006

Fed Generates $46.1 Billion Profit in 2009

You won’t see this headline on the top of the front page of your local newspaper. Since the Fed has never been audited – it is impossible for anyone to truly understand how the Fed attained these profits or if these numbers are even accurate. We are usually told something very vague like the article below tells us – [the fed] generated record profits as its holdings of Treasury, mortgage-backed securities and agency debt grew’. Not a whole lot of details – there never have been – and never will be unless something changes.

These articles also deceptively lead us to believe that the Fed contibutes huge sums of money to the Treasury – as if they are net contributors to the taxpayers of America. The opposite is true – the Fed creates our money and then charges us interest on the money they create – leaving the American people with a $12 trillion dollar national debt that continues to grow – and can never be re-paid.

As you can see – this is a very profitable business – it always has been – and will continue to be profitable – unless something changes. This is why our national debt growth has now gone parabolic – climbing the steep incline of an exponential growth curve. As you’ve seen me say before – when exponential growth ends in our finite world – it’s not a smooth landing.

It’s also interesting to note that we are never told who owns the Fed. We’re told that the Fed gives a significant amount of money back to the Treasury – but what about the other $6 billion? Who just earned $6 billion dollars last year? Would you believe banking families of Europe? The same families who own the European Central Bank, the Bank of England, etc.

Who Owns the Federal Reserve?

If you want to learn some truth about the world we live in – researching the owners (shareholders) of the Fed is a great place to start. You’ll get very uncomfortable – but you’ll learn some real truth.

John
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I noticed today that Chris Martenson also picked up on the Fed’s ‘earnings’ release. As always, he provides excellent insight into what’s really happening behind the smoke and mirrors. I’ve added his blog post below.

jg – Jan 13, 2010
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Time For An Audit … Or Some Competition

Wednesday, January 13, 2010, 10:55 am, by cmartenson

At first I thought a recent article in the Washington Post regarding ‘earnings’ at the Federal Reserve was a joke. But it appeared in the business section and there weren’t any “gotcha!” retractions the next day so I assume it was meant to be serious.

For those that understand the very simple idea that the Federal Reserve prints Federal Reserve Notes (or their electronic equivalent) out of thin air, the concept of ‘earnings’ on those same thin-air money units is intellectually challenging.

Here’s the article:

Federal Reserve earned $45 billion in 2009

Wall Street firms aren’t the only banks that had a banner year. The Federal Reserve made record profits in 2009, as its unconventional efforts to prop up the economy created a windfall for the government.

The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank. The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury.

The numbers are good news for the federal budget and a sign that the Fed has been successful, at least so far, in protecting taxpayers as it intervenes in the economy — though there remains a risk of significant losses in the future if the Fed sells some of its investments or loses money on its stakes in bailed-out firms.

First of all, the word ‘earnings’ implies that value was created and/or something was at risk. Neither applies to the Fed. Let’s review the process by which they ‘earned’ money in 2009. We’ll simplify this by examining just one of their activities, the purchase of Treasury debt.

Step 1: Using keystrokes, create $300 billion out of thin air.

Step 2: Buy Treasury notes and bonds with the $300 billion.

Step 3: Collect interest from the US government on those notes and bonds.

Step 4: Report record ‘earnings.’

Step 5: Wash, rinse, repeat.

What is the meaning of ‘earnings’ in that series of steps? What value was created? Where was the risk? In this context the word ‘earnings’ has no meaning or any relevance at all. It’s the exact same thing as if the Fed had printed $49 billion dollars put them on the income statement and called them ‘earnings.’ Or $10 trillion dollars. Or $1 dollar. When you can create any number you wish using a keyboard, the number itself is meaningless.

Further, we might wonder about the comfy relationship where the Fed buys government debt, the government then pays interest on that debt to the Fed, and the Fed then (mostly) returns these interest payments to the government as “excess profits.”

In that little circle the Fed reports profits and the government reports revenue from the Fed. They both ‘win!’ But the entire thing is really just a sleight-of-hand exercise wherein the Fed prints money out of thin air and hands it to the government.

It’s a crafty little game with lots of moving pieces but the essence of it is that money was brought into existence without any corresponding goods and services being created, which means that it is not a good thing (as reported) but is actually a bad thing. It is among the most inflationary and dangerous monetary activities that can be performed, at least if the past 800 years of monetary history is any guide. It looks clever and sounds sophisticated, but it really is nothing more than a distributed tax on every outstanding dollar in the system. If the founding fathers despised taxation without representation, they would have truly hated this shell game.

Second of all, I reject the entire premise of the WaPo article in that it promotes the notion that the Federal Reserve operates like any other normal business with a profit & loss (P&L) statement that in some way provides meaningful information.

The simple truth is that the Federal Reserve creates money out of thin air with which it buys debt instruments. That’s it. That’s its entire business model. Sometimes those debt instruments are US Treasury bills, notes and/or bonds and othe r times (like in 2009 mainly), they are mortgage backed securities, destroyed CDS and CDO paper from Bear Stearns, GSE agency debt, etc. and so forth..

The Fed business model is this; thin-air money is created and exchanged for debt.

If any other company could perform such an operation then it might be useful to compare their relative performances meaning that a P&L analysis could provide some insight. But given that only the Fed has this power, the information is pretty much meaningless and becomes utterly useless without a corresponding audit and ‘mark-to-market’ accounting rules.

Since we have no idea to what extent the Fed is sitting on massive losses, or even what they are sitting in many cases, the concept of P&L ‘earnings’ are as completely irrelevant as anything can possibly be. Thus, promotion of the idea of Fed ‘earnings’ is not just an error, it’s misleading.

Here’s another gem from the article that captures the essence of my point:

“This shows that central banking is a great business to be in, especially in a crisis,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute and a former Fed official. “You buy assets that have a nice yield, and your cost of funds is very low. The difference is profit.”

“The cost of funds is very low.” That part made me smile. It’s like me saying that the cost of using a calculator to multiply by a higher number vs. a lower number “is very low.”

A central bank is not a business, it is a government-enforced cartel with the unique ability to create money out of thin air. This is not a trivial distinction and we would do well to not try and understand a central bank’s activities through the same lens that we use to view the rest of the productive world.

Instead, we would be best served by paying close attention to what the most powerful cartel is up to as their private missteps become our collective pain. This is why I completely support the idea of having the Fed audited by an independent third party just like any other public business.

If the Fed continues to refuse to do so then I would support the establishment of a competing entity to the Fed that could also issue its own government backed currency. Then the marketplace (you and I) could decide for ourselves which unit of currency we’d prefer using whatever information and data each would be willing to provide. One thing that nature has taught me is that competition makes for a stronger and more resilient organism.

Without any accountability, and with a complete monopoly, the Fed has grown weak and lazy as evidenced by their horrible serial-bubble blowing performance over the past two decades and the apparent inability to differentiate between asset inflation and wealth. It is either time to enforce complete transparency or, preferably, create some legitimate marketplace competition.

So that’s it; let’s have an audit with publicly available results, or let’s have some competition.

Or maybe even both?
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January 12, 2010, 9:29 AM ET

Fed Generates $46.1 Billion Profit in 2009

By Meena Thiruvengadam

The Federal Reserve had its biggest bottom line ever in 2009, generating record profits as its holdings of Treasury, mortgaged-backed securities and agency debt grew.

The Fed last year generated a net income of $52.1 billion, of which it paid $46.1 billion to the U.S. Treasury, the Fed said Tuesday. The windfall came as the Fed’s balance sheet ballooned to more than $2.2 trillion and the Fed acquired billions in securities through unusual asset-purchase programs aimed at spurring economic growth.

The Fed last year purchased $300 billion in US government debt and is on track to buy $1.25 trillion in mortgage-backed securities plus $175 billion in debt from government-backed mortgage agencies. The larger holdings more than offset the historically low interest rates that bring the Fed its income.

The Fed’s 2009 earnings were up 47% from 2008 when it generated a net income of $35.5 billion and transferred $31.7 billion to the Treasury.

The 2009 earnings reflect an estimated $3.7 billion in losses on holdings the Fed acquired when it helped J.P. Morgan Chase & Co. buy Bear Stearns and when it rescued American International Group.

Of the 2009 earnings, $46.1 billion was generated through open market operations and $5.5 billion was generated by companies it created as part of the Bear Stearns, AIG and other rescue operations. The Fed earned $2.9 billion in 2009 on interest on loans it made to banks and other institutions.
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JANUARY 13, 2010

Fed’s Power of the Press

By PETER EAVIS

Wall St. Journal

The Federal Reserve’s blowout 2009 profit is no reason to cheer. Rather, it is a reminder of the dangers inherent in the extraordinary policies the central bank has pursued during the credit crunch.

Last year, the Fed earned $52.1 billion, with most of that income coming from interest-payments on bonds that it bought during the year to shore up the economy and credit markets.

Anyone with access to printing presses could have racked up similar gains. But the Fed’s purchases leave it exposed. Its assets are 43 times its capital, compared with 15 times at Goldman Sachs. As a result, its equity could be wiped out by just a 2.8% drop in the value of its Treasurys and securities issued by Fannie Mae and Freddie Mac. True, the Fed could hold on to those securities and ride out any losses, and retain earnings to boost capital, but what self-respecting central bank wants to risk a negative net worth?

Even the fact that the Fed is, as usual, paying most of its profit to the Treasury isn’t good news. It means the Treasury is paying almost no interest on a large slug of debt purchased by the Fed. That can only chip away further at fiscal discipline.

The Fed’s asset purchases did help avert a possible depression. But they’ve also weakened the dollar, fueled frothy assets markets, and stopped long-overdue adjustments to the economy and financial system. They could also stoke inflation if maintained too long. If these cons start to obviously outweigh the pros, the Fed’s policies could quickly be discredited.

And since printing money is the last trick in its bag, its failure would take the central bank into dark, uncharted territory.

Something to think about as Fed cheerleaders compare the central bank’s returns with those of Wall Street.

Write to Peter Eavis at peter.eavis@wsj.com

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