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All is not well in bankland,
despite the industry
earning $28.8 billion in the second quarter, nearly $8 billion more than a
year ago. Earnings have improved for eight quarters in a row. Not so
coincidentally, loan-loss provisions fell by $21.4 billion from the second
quarter of last year. So any grow in earnings is from setting aside less
money for bad loans. Banks figure the worst is over.
Revenues for the nation’s banks were lower for
the second consecutive quarter and Bank of America and others are trading at
a fraction of book value, which means the market believes there are more
write downs and losses to come.
But those numbers don’t include the
nation’s central bank–the Fed. The Fed is making money like..well..it
was printing the stuff.
In his “Contrary Indicator” column,
Daniel Gross writes
half the story,
The Fed doesn’t make money the way regular
banks do — by charging ATM fees and making mortgage and credit card
loans. Rather, it collects interest on the securities it acquires, by lending
money to banks, and by charging fees for certain services.
What he doesn’t tell you is that the
Fed’s cost basis in these securities and loans is zero. Bernanke and
company have a bottomless checkbook. Money for nothing.
So as long as the entities that borrow from the Fed
pay their interest, “this is a business so easy even bankers could make
a profit doing it.”
And the central bankers at the Fed do just that. It
used to be the Fed made a steady $20-$30 billion year in and year out. Then came the meltdown, and the Fed’s balance sheet
melted up.
The central bank’s earnings rose to $53.4
billion in 2009 and jumped again to just short of $82 billion in 2010.
Gross figures the Fed to make even more this year.
Bernanke’s balance sheet foots to $2.83 trillion, with $2.6 trillion of
that in securities. “And through September 29, the next-to-last day of
Fiscal 2011, Fed earnings had contributed $82.5 billion in revenues to the
government for the fiscal year, according to the Daily Treasury
Statement,” writes Gross.
The central bank has a long way to go to cover the
federal government’s $1.3 trillion deficit. But Bernanke has plenty
more bailing out to do, which will mean a bigger balance sheet and more
earnings.
A bigger Fed plus more TARP (which was reportedly
profitable) means the deficit problem can be licked in no time.
Article originally published on www.mises .org
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