Today the WSJ reported that the Fed remitted $76.9 billion of profits to the US Treasury last year.  What a load of bull!  To say that the Fed earns a "proft" on what it purchases implies that the Fed could incur a "loss."  This makes no sense.  The Fed sends all excess funds to the US Treasury.  There is no accounting for good or bad purchases.  I took a few minutes to write an email to the authors of the article.  I've included it below.  

 

 

Messrs Di Leo and Derby;

 

I ready your article today and was disappointed to see that it follows the same incorrect story line that others write, namely that the Fed remits “profits” to the Treasury.  The Fed does not record profits, it simply records balances.  Any excess balance held by a Federal Reserve Bank after operations and dividend payments to members is by law remitted to the US Treasury.

 

This is very important because most casual readers will assume there is some attempt by the Fed to maintain a level of “profitability,” or some other way of measuring the success or failure of their investments, when this is not the case.

 

The Fed creates funds that are used to purchase whatever the Fed chooses to purchase.  Because the funds used for purchase come from nothing, it does not matter if the holdings at the Fed go up or down in value. There is no “balancing,” there is no “P&L.”  If interest rates shoot higher, moving from roughly 1.92% on 10-year Treasuries to 4%, it would make sense that the holdings of the Fed would fall in value.  So what?  The interest payments received would be the same, so that money has not changed.  If the Fed then sold the bonds they would receive less than the value at which the bonds are currently listed on the Fed’s inventory.  So what?  The funds would still flow to the Fed, and would, after expenses and dividends, flow to the US Treasury. There would be no “loss” recorded anywhere.

 

The entire notion that the Fed is working to minimize losses, or that the Fed takes “risk,” is without basis.  When the entity can, and does, create money at will, and does not maintain a funding account, there cannot be any risk.  What, exactly, would they lose?  Where would those losses flow?

 

To follow this to the logical end (that Fed purchases could “lose” and therefore negatively affect some accounting at the Fed) there would have to be some mechanism that operated inversely to a “profit.”  When “profits” are “earned,” as stated in your article, the “profits” are sent to the US Treasury.  If so, then when “losses” are incurred, who sends money back to the Fed?  Obviously no one, as the Fed cannot lose. 

 

If the Fed opened tomorrow and found that every single security it held was suddenly worth $1, it would represent a loss of $3.3 trillion (give or take).  Then the Fed would immediately create new funds, purchase 1 day securities in the open market, and voila!  The day after tomorrow the Fed would once again have holdings and funding.

 

Of course, every time the Fed exercises its power it leaks a little value from all existing dollars, but that’s another story.

 

Posted in : Federal Reserve 

Comments

Great comments. Most people have no idea how the Fed and Treasury work. Most don't understand why national debt of each European State in the EU can't be dealth with like it's delth with in the US. Most people compare the US with Greece, whereas they should be comparing Greece to California or Illinois. States can't print money. This would make a good subject for you next book.
Posted by revans9139@msn.com | January 11,2012 07:34 PM

There would be no “loss” recorded anywhere. Therefore there could be no profit. You can’t separate Profit FROM Loss. That would be like separating the wet from water. In reading Harry’s books and keeping in mind the birthrate, it brings to mind, from whence generation those authors [Fed “Profits”] come from? Oh the posterity!
Posted by toddps@earthlink.net | January 12,2012 05:41 AM

And who is behind the fed by the way....It is a private bank with private owners. Ben is only the person who represent this group of private owners. How many money from US tax payer this group is taking for themselves since they don't have to report what they do?
Posted by timhortons2719@yahoo.ca | April 04,2012 01:23 PM

Post a comment

You must be logged in to post a comment OR commenting not allowed.