This is one example of many articles that report on the alleged profits that the Fed posted:
What’s the Austrian response to this? Are the numbers fudged in some crucial way? Or is the argument just that the monopolistic presence of the Fed in any financial operation can muster a profit since it can always just print more money? Something along those lines?
Thanks in advance,
Alex
Come on, this is explained in the linked article.
The Fed purchases stuff using money it creates, this stuff brings profit.
To think of it, if you could pay by just writing “This is one billion dollar” on a post-it, couldn’t you make any profit you want? Just buy half of stuff available on NYSE, heck, buy all the stuff! At the end of the year you will have a tremendous profit (though most of it in your own post-its returned to you).
Mr Upstanding Citiizen would lend the hit man $50,000. The first week he got 5% back, or $2,500. “OMG, it really works,” thought Mr Citizen. The second week he got back $2,500 again. The third week he got a sob story, and the fourth week he got a “Stop bothering me”. He got back 10% of his money, and lost 90%.
This is exactly the situation the Fed is in. They are getting back some small amount of interest [25 billion a year on a trillion dollar investment. 2 and a half percent]. But the stuff they own, which they bought from the banks in order to bail them out, is called “toxic assets”, meaning “loans that very likely will never be repaid”. if they ever tried to sell those loans to someone, they would get pennies on the dollar. They are insolvent, meaning broke.
Not exactly. The US govt will give the Fed money, which the Fed will hand right back to the govt [as the first paragraph in the article states]. So the Fed is making money for the govt by first taking the govts money and then handing that same money back. Meaning they arent making money for the govt at all. It’s all a farce.
[BTW,For this noble and selfless benefit to the public, they will skim a mere 2 billion off the top for themselves. After all, they have families to support.]
“This is exactly the situation the Fed is in. They are getting back some small amount of interest [25 billion a year on a trillion dollar investment. 2 and a half percent]. But the stuff they own, which they bought from the banks in order to bail them out, is called “toxic assets”, meaning “loans that very likely will never be repaid”. if they ever tried to sell those loans to someone, they would get pennies on the dollar. They are insolvent, meaning broke.”
Good explanation, and I agree that’s what’s happening, but I’m not familiar enough with finance to know whether or not that’s what can actually be reported as profit. If in a fiscal year I lend someone $100 and the person pays me back $50 of it (with the rest of it agreed to be paid back next year), can I report a $50 dollar profit? Isn’t that more like a $50 net loss? I guess neither terms really make sense since it’s an investment you can’t measure the success of until it matures. But is that what the Fed means when they say they profited in 2010? Are they just totally disregarding the amount they originally lent (i.e. the amount they expanded the balance sheet) and counting only the interest payments that will almost certainly dry up before maturity?
I want to actually get the terminology right and not misrepresent the Fed’s report on profit. Yes, I know central banks are shady and there’s a lot that’s terrible about them, but I want to get the terminology straight rather than do what I’ve seen a lot of armchair Austrians do and disintegrate into an anti-Fed diatribe.
“The US govt will give the Fed money, which the Fed will hand right back to the govt [as the first paragraph in the article states].”
What do you mean the US govt will give the Fed money? You mean the Fed buys up treasuries? Not the same thing…
Yep. A close reading of the article shows that to be the case. The fact that someone owes them money is considered an asset in their books. I quote:
The combined annual financial statements for the Federal Reserve Bank system revealed that it had increased its asset holdings by $193 billion in 2010, reaching a total of $2.428 trillion.
The balance-sheet boost was driven in large part by the Fed’s second effort at quantitative easing, which has the Fed buying up hundreds of billions of dollars in Treasury bonds in an effort to boost private lending.
The Fed lends the US govt money, which is called buying Treasuries. The US govt makes an interest payment, which the article called a profit for the Fed. That payment is what I called “the US govt gives the Fed money.” The article states that the Fed just gives that money right back, to the tune of 79 billion. That’s what I called “which the Fed will hand right back to the govt”.
"The fact that someone owes them money is considered an asset in their books. I quote:
The combined annual financial statements for the Federal Reserve Bank system revealed that it had increased its asset holdings by $193 billion in 2010, reaching a total of $2.428 trillion.
The balance-sheet boost was driven in large part by the Fed’s second effort at quantitative easing, which has the Fedbuying up hundreds of billions of dollars in Treasury bonds in an effort to boost private lending."
Isn’t it considered an asset to have someone owe you money? Considering it will be a cash flow, is it that unusual that they’d consider that to be an asset? Regardless, whether or not it’s considered an asset, my question was whether these cash flows can be considered as “profit”, when it just seems like one side of the equation, leaving out what was originally lent. You say that they are indeed disregarding the amount they original lent, and that that is evidenced by the fact that they consider money owed to them to be an asset, but why is that the important distinguishment? What is the alternative to considering money owed to be an asset, and I’m assuming that alternative would take into account the money originally lent when determining “profit”?
Alex,
We could use some help from an accountant here, but I’ll tell you what I think is how things are done.
I think it standard accounting procedure to consider money owed you an asset and interest paid you a profit.
I also think that money owed you is an asset, but the value of this asset is not neccesarily the dollar amount of how much he owes you.
In some accounting methods it is how much you could get if you tried to sell that loan to someone.
Say you lent someone $10,000, and that someone is a homeless drug addict with an IQ of 15 who will never be able to repay and has no collateral. One way of doing it is to say that your asset is $10,000. Another way, called ‘mark to market’, is to say your asset is worth zero, because nobody will be foolish enough to buy that loan from you.
Now I think the law recently changed and the accounting method now legally accepted is the former. This change was made when the housing market crashed, to save the banks from having to declare bankruptcy given the low low value of their toxic assets.
Have a look over here, especially at the intro and at the section on the Emergency Stabilization Act of 2008: http://en.wikipedia.org/wiki/Mark_to_market
Just to spell things out more. Clearly mark to market is what a sane person would look at. Say you were thinking of buying a business and wanted to inspect their books before making making a decision. How would you want that loan to the homeless drug addict to show up on the books? As an asset worth $10,000 or as an asset worth zero? Of course as worth zero, because that is what is really going on. You will collect zero from that drug addict.
Now let’s say the only asset the company had was that loan to the addict, and last year they managed to get a 5 dollar bill out of him. So that the company reports a profit of $5. Would that change anything?
Same thing with the Fed. Sure they made a few billion in profits, but their total value as a financial entity is really close to zero, because their balance sheet contains a trillion dollars of toxic assets that are worth pennies on the dollar if we use mark to market accounting.
BTW in that Wiki, they say that mark to market is no longer the official method because it is flawed somehow or other. But that’s not the real reason, it’s just the feeble excuse. The real reason is that otherwise all the banks would have to declare bankruptcy.