The Fed has made so many bank loans, most of them short term, over the last several quarters that it would bound to lose money. But, it hasn’t so far. The agency has made money on capital it has invested in helping soften the blow of the liquidity crisis.
Accoring to the FT, “The Federal Reserve has made a $14bn profit on loan programmes that provided hundreds of billions of dollars in liquidity to the financial system since the start of the crisis two years ago.”
The weakness of the analysis is that it is only a snapshot in time that might lead taxpayers to believe that the Fed will provide profits that could help offset the federal deficit. That may not be true at all.
The Fed still faces a banking system in which most large firms still have toxic assets, although most of the losses against them have already been taken. The trouble with those assets is likely to be replaced with souring business loans, consumer credit defaults, and commercial real estate mortgage foreclosures.
Don’t count the Fed’s chickens until the eggs have hatched.
Douglas A. McIntyre