Federal Reserve Posts Record Profits For 2009: $52.1 BILLION

Where did the capital and production capacity come from to generate such a successful year? This money comes from a different source than the $700 billion TARP fund. The source: keystrokes (we'll come back to this). Quantitative easing, Repurchase Agreements, Securities Lending, Commercial Paper Facilities, and other programs created in late 2008 allowed the Fed to purchase mortgage pools, Treasury Debt, Commercial Paper (short term corporate loans), Fannie Mae/Freddie Mac bonds, and consumer credit receivables. The Fed will turn over a big portion of the profits to the Treasury, about $46.1 billion. Here is a visual of the Fed's expansion:



Keystrokes create billions and trillions of dollars in most modern societies that can be later destroyed or absorbed. If I enter the number 1,000,000,000 on one side of my balance sheet I will need to offset that with something. My job would be to manage the credit risk of the people I'm lending $1b to so that I can continue to provide a lending service. It sounds like I'm getting interest on debt that I couldn't afford to buy in the first place, which is true, but a mechanism like the Fed has to exist to expand and contract the money supply in different economic cycles. They are the only ones authorized to do this currently.

In the picture above The Fed entered liabilities into their accounts and offset them with the aforementioned assets: Treasury Debt, Commercial Paper, Credit Card Receivables, Mortgage Pools, and so on. This was why we kept hearing that the Fed was the lender of last resort. The private debt markets (banks and investors) had literally stopped lending to us and did not want to refinance existing debts. As the Fed bought these assets as a lender of last resort (remember your company's debt or your personal debt is someone else's asset) the debtors like consumers, the US Treasury, and private corporations continued to make periodic payments of principal and interest.

The interest portion of the debt accumulated to the $52.1 billion number we saw. The issue is with the principal...what is it worth? If the health of the economy does not improve or if credit contracts even slightly once more, the debt will be marked down in value and could potentially drive down the value of the dollar since dollars are backed by what the Fed holds as assets and what the market deems those assets to be worth. In reality the currency of any fiat system is backed by government enforcement of that currency as legal tender.

Source: econbrowser.com, Federal Reserve Press Release, The Associated Press