Can the Fed Make a Profit for the Taxpayer? July 21, 2011, Bob Eisenbeis, Managing Director, Chief Monetary Economist
At the Federal Reserve’s July 13, 2011 hearings before the House Financial Services Committee, Representative Al Green cited evidence that the Fed made a profit on its QE 1 and QE 2 asset acquisitions and that the transfer of those funds back to the Treasury had helped reduce the deficit. Chairman Bernanke, in response, stated that the Fed would make a profit and the proceeds remitted to the Treasury would help reduce the deficit. The essential argument is that the Fed has earned interest income on its large holdings of securities, and after deducting expenses and required contributions to surplus and capital, the remainder is remitted to the Treasury as “profit” and is scored by the Treasury as revenue. The sums are huge; and last year, for example, the Fed transferred $ 79.258 billion to the Treasury. From the Fed’s perspective, this transfer of funds may look like a remittance of “profits,” but despite that claim, these are not profits from the taxpayer’s perspective. In fact the Fed cannot make a profit for the taxpayer, related to its asset acquisition activities, whether as part of the bailout or in its normal course of business. To understand why, it is necessary to engage in what some readers will regard as a mind-numbing discussion of Treasury and Federal Reserve transactions and accounting. Intrepid readers can find the detailed analysis posted on Cumberland’s website at http://www.cumber.com/commentary.aspx?file=072111a.asp. For those who choose to read no further, the bottom line is that, from the taxpayer’s perspective, the government (Treasury) is paying interest to itself (the Fed). The Fed takes out its operating expenses that are now growing because of the interest the Fed is paying on excess reserves. The remainder is returned to the Treasury. In the process, under current government accounting conventions, an expense is magically converted into revenue. This is financial alchemy, but from the taxpayer’s perspective it unambiguously represents a net loss. The amount returned to the Treasury by the Fed will be less than what the Fed receives as an interest payment.
Cumberland Advisors® is registered with the SEC under the Investment Advisors Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in states and/or international jurisdictions where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services.
Please feel free to forward our commentaries (with proper attribution) to others who may be interested.
For a list of all equity recommendations for the past year, please contact Therese Pantalione at 856-692-6690,ext. 315. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.
Read Full Article »