While searching the Fed website for more information on federal agency securities this morning, I stumbled upon the Fed's most recent annual report. Become a Complete Fool
Of course this piqued my interest, so I dove in. It's short, and easy to understand if you know basic accounting. It also has historical data going all the way back to the Fed's creation in 1914 so it gives an interesting window on history. Here's some of what I found:
The Fed has a foolproof business plan. They create as much money as they want, then loan it to the Federal government and collect interest on that money. They do a few other things, but that's their core plan. In 2003, $22.6 Billion of the Fed's $23.8 Billion in revenues came from interest on treasuries.
Unfortunately for the Fed, they have to give most of their interest income back to the government, so they only got to keep about $1 billion in profits for 2003. That's still an awesome profit margin for a company with less than $2.5 billion in expenses and without any fraudulent pension fund or stock options accounting to boost the numbers. Of the billion-dollar profit, $517 Million got paid out as dividends to the Fed's shareholders, with the rest getting "transferred to surplus." I bet most of you never realized that the Fed was such a huge profit making machine for shareholders.
Over the history of the Fed, about $6.5 Billion has been paid out as dividends and $13 Billion has gone into surplus. Over the past 50 years, dividends have gone up by about 7.3% per year on average, and over the past 10 years dividends have gone up by more than 10% per year on average, so the profitability of the Fed is increasing, even though the number of member banks has been decreasing.
Wars have been huge moneymakers for the Fed. The debt racked up by the government during World War I gave the Fed its first big boost, with current income (revenues) going from $16 million in 1917 to $180 million in 1920. World War II saw security holdings rise more than 1000% from 1941 to 1945. The Cold War (especially during the Vietnam War), the War on Poverty, and the War on Terror have helped pushed the federal government ever deeper into debt and have led to consistent and tremendous growth in the Fed's revenues and profits.
The Fed's revenues have been declining sharply, from a peak of almost $34 Billion in 2000 down to $23.8 Billion in 2003, because interest rates have been falling. Since the amount of interest the Fed can keep is capped by Congress, this doesn't really matter to the Fed's bottom line. Most of the treasuries held by the Fed mature in less than 3 years, so revenues will rise and fall rapidly with interest rates.
It's interesting to look at the Fed as a moneymaking corporation, although I'm sure the profits of the Fed as an enterprise don't guide Fed policy much. It's just too easy for the Fed to make money. They literally "make money," after all.
The Fed's real power to generate profits for member banks lies in the Fed's ability to expand or contract the economy with monetary policy to suit the bankers' needs. As a private company owned and controlled by bankers it serves the needs of its member banks first. Taking a look through the annual report is a good reminder that banks own and control the Fed, not the government or the American people.
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While searching the Fed website for more information on federal agency securities this morning, I stumbled upon the Fed's most recent annual report.
Become a Complete Fool