‘Creative Accounting’ at the Federal Reserve?

As the story goes, the Federal Reserve”made” $91 billion dollars last year, sending $89 billion of that to the U.S. Treasury. Until 2008, about the only earning assets the Fed owned were U.S. Treasury bonds.

Let’s stick with that for the moment.

The interest the Fed earns on those bonds is paid by the U.S. Treasury! The Fed keeps 1 percent of the earnings to pay its rent and sends the rest back to the Treasury. So every dollar the Treasury pays to the Fed is returned, less a 1 cent handling cost. So the interest cost the Treasury incurs is magically turned into Treasury income!

There is no limit in principle to the amount of Treasury debt the Fed can buy so it can makes lots of money!! The Fed has increased its assets by over $2 trillion since 2007, a real money-maker!

Yes, the Fed has also purchased a lot of mortgage backed securities, but those have a Treasury guarantee, so same deal, in terms of who bears the risk, but of course mortgage holders are paying the interest and giving it to the Treasury (that lent them the money in the end).

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