The headline on MarkeWatch blared: Fed earns $77 billion from balance-sheet explosion. That got my attention.
We learned the following:
The Federal Reserve and its district banks earned the second-highest amount in its history last year as the central bank profited from increasing its balance sheet to boost the U.S. economy.
The Federal Reserve and its district banks said Tuesday that it earned $77.4 billion, down from $81.7 billion in 2010.
A lot of readers stopped reading there. If they did, they are not curious people. They refused to follow the money.
The next sentence is crucial: “The bumper earnings allowed the Fed to distribute $75.4 billion to the U.S. Treasury, also the second-highest level ever.”
Got that? The FED gave almost all of the money back to the government. It did the same last year.
It does the same every year. By law, the Federal Reserve System is not allowed to keep the money. That has been true ever since World War II.
Most critics of the FED are unaware of this. They talk as though the FED keeps all this money. From 1914 until World War II, it did. But that was a long time ago.
The FED inflates. We read: “Its balance sheet reached $2.92 trillion in 2011, up from $2.43 trillion in 2010.” Wait a minute! If 2010 was more “profitable” for the FED, but the FED held fewer IOUs from the government, why did it earn more interest in 2010? The article did not ask this. Here is the answer: interest rates on government IOUs are lower.
The article said this:
Because it effectively pays for those securities out of money it creates from thin air, the so-called quantitative easing programs are extremely profitable. A Federal Reserve official on Tuesday said the central bank doesn’t pay attention to profit when it conducts its operation.
But it really does not matter how “profitable” this is. By law, it has to credit the government with most of the interest the government pays to the FED.
In short, it’s all an accounting game.
Did you know this? Most people who read about the Federal Reserve do not know this.
The FED is not about profit. It’s about control over the money supply. It’s about bailing out big banks.
There is an old rule: “Know thy enemy.” If you think the FED is about making money, you don’t know the FED. It’s not about making money. It’s about controlling market forces so that the big banks are taken care of in any crisis. It’s about big bank bailouts.