Federal Reserve Profits

It may be my imagination, but every time I’ve argued that the Fed’s lending (including securities purchases) will not cost the taxpayers I’ve felt eyes rolling. The low level of much financial reporting over the past two years has left the impression that Fed lending is done with taxpayer funds and is tantamount to government spending. Not so. There is a big difference between spending funds and making loans that will be repaid with interest—or repaid through sales of deeply discounted collateral.

Even if the Fed’s new activities did result in a net loss–which is not the case—it would be a loss in the opportunity-cost sense of the loss of extra gains. This is true because the Fed—along with all central banks—creates new bank reserves and money by its purchases. Any loss would be a deduction from the extra gains associated with newly created money rather than a loss of money already existing. The Fed is a reliable cash cow for the taxpayers, not a user of taxpayer funds.

Most Fed earnings come from interest on net security purchases made in conducting monetary policy. Since a growing economy, or an economy that needs to grow, needs a gradual expansion of money to support it, the Fed, over time, will buy more securities than it sells or have reached maturity. Those securities earn interest, which the Fed returns to the Treasury after it meets its expenses and adjusts its capital levels to comply with the Federal Reserve Act. A very small part of Fed earnings come from sales of priced services to banks and other depository institutions. The amount transferred to the Treasury is usually close to 90 percent.

On January 12, the Board of Governors made a preliminary announcement of the earnings of the Reserve Banks during 2009 and the amount transferred to the Treasury. The growth in its balance sheet in late 2008 increased the amount of those earnings in 2008 and even more in 2009.  In 2009, income earned by the Reserve Banks totaled $52.1 billion, of which $46.1 billion were transferred to the Treasury. In 2008, earnings were $35.5 billion and the amount transferred to the Treasury totaled $31.7 billion. Earnings increased $16.6 billion, or 46.7 percent, while transfers to the Treasury increased $14.4 billion, or 45.4 percent. The percentage of earnings transferred were 88.5 percent in 2009 and 89.3 percent in 2008.

So, in addition to saving the financial system with its special lending and investing programs, the Fed actually made more money for the taxpayers in doing so. Too bad taxpayers don’t know it.

Read more about my take on issues that relate to the Federal Reserve.

Comments (2)

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  1. Kevin says:

    You would not believe the number of people who believe that the Fed’s profits go to the Rothschild Family and other wealthy over in Europe. I wonder where that got started?

  2. Brian says:

    Could the “excess” reserves on the books at the banks be a sign that those banks banks don’t really trust their base reserve numbers? Put another way, are they (a) keeping excess reserves as protection from another downturn (are they real reserves), or (b) do they not believe the asset prices that they are using to generate the reserve numbers they report to the fed?

    I’m not asking you to opine on the quality of bank balance sheets, but I just want to understand if a lack of confidence in their assets would be reflected in the “Excess Reserves” data.

    Kevin, I recommend you watch “So I Married an Axe Murderer” a comedy by Mike Myers. The main character’s father hold a conspiracy theory about the Queen, The Getty’s, The Rothschilds, The Vatican, and of course, Colonel Sanders.