Junior on Fed "Profit"

Neil Irwin (NI) has a 12 January 2010 Washington Post piece claiming the Fed had a $45 billion 2009 profit. With $2.2 trillion in assets, suppressing interest rates by 6 percent, my estimate, the Fed gave banks about $132 billion in 2009 taken from savers. A calculation like NI's makes sense in Stalin's world of "free capital"! About 40 years ago Kenneth Arrow, Stanford economics professor, introduced the "social rate of discount" concept. After various machinations, he estimated it was 6-7% per year in real terms. Let's use 6.5%, a 1.8% 2009 CPI increase and a $2.2 trilliion Fed balance sheet, the Fed should have earned (.065 + .018 = .083; .083 x $2.2 trillion = $183 billion) $183 billion last year. Ergo, US taxpayers suffered a $138 billion "opportunity loss" ($183 - $45) arising from the Fed's existence. Kill the Fed! Here's Junior's 12 post at Junior Deputy Accountant: http://www.jrdeputyaccountant.com/2010/01/fed-turns-45-billion-profit.html. Does no one at WaPo understand "cost of capital"? These guys can work for Citigroup. Fed accounting is a joke. Here's a link to my 29 December 2009 post on the Fed's laughable 2008 financial statements: http://skepticaltexascpa.blogspot.com/2009/12/zimbabwe-bens-audit.html. I blasted government accounting on 25 September 2009, and will continue to do so:

http://skepticaltexascpa.blogspot.com/2009/09/government-accounting.html.

"Last year the Fed earned $52.1 billion, with most of that income coming from interest payments on bonds that it bought during the year to shore up the economy and credit markets. Anyone with access to printing presses could have racked up similar gains. But the Fed's purchases leave it exposed. Its assets are 43 times its capital, compared with 15 times at Goldman Sachs", Peter Eavis at the WSJ, 13 January 2010, link:

http://online.wsj.com/article/SB10001424052748704586504574654780067214134.html.

"The Fed's 2009 earnings were up 47% from 2008, when the central bank generated a net income of $35.5 billion and transferred $31.7 billion to the Treasury", Meena Thiruvengadam at the WSJ, 13 January 2010, link: http://online.wsj.com/article/SB126333721463026795.html.

Imagine, even the Vampire Squid (VS) is better managed and has more accurate financials than the Fed.

I found a way out for the Fed, an exit strategy. Oh you of little faith, a Fed exit strategy! There's something in it for the VS! It's a win-win. Use the PEG ratio, "price-earnings growth", I think the PEG ratio is an absurd metric, but I'm not a Wall Street Managing Director. Since the Fed earned $52.1 billion in 2009, or 47% more 2008, let's assign it a 1 PEG, therefore the Fed is "worth" $2,449 billion ($52.1 x 47). Not going overboard, have the Fed issue new stock to the public of 20% of its "worth" or $490 billion ($2,449 x .20). Now Merrill Lynch "analysts" can swear 47X earnings for the right to counterfeit currency is cheap. Now enter He who does "God's work", Lloyd Antoinette Blankfein (LAB) who in the public interest will do the Fed's IPO for 50% of VS's normal 6.5% fee, 3.25%, a mere $15.9 billion ($490 x .0325). Oh, VS's sacrifices for Joe Schmoe, giving up $15.9 billion in fees to make the Fed IPO succeed. Who says Zimbabwe Ben has no exit? LAB will give up 75% of VS's fee on the 15% ($73.5 billion) overallotment. Oh LAB to think, leaving another $3.6 billion on the table for Joe Schmoe. What a patriot. And to think, I believed all along you had a shrine to Mammon in your office. Silly me.

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Any idiot can run the Fed at a "profit" if the idiot's cost of capital is zero.