Skip to main content

Beware the fabulous money machine

Spencer Jakab penned an interesting commentary for FT Weekend on the Federal Reserve's $52 billion profit (unaudited) for 2009. Here's an excerpt from that piece, "Beware the fabulous federal money machine":

"Unlike its New York brethren though, the Federal Reserve has a literal licence to print money, minting some $52bn in profit last year and paying $46bn in dividends to its shareholder, Uncle Sam...

“The man on the street doesn’t understand the $46bn earned by the Fed and given to the Treasury,” laments David Kotok, chairman of Cumberland Advisors.

Financial markets do, and it is making them increasingly skittish. The Fed’s profits stem largely from its purchase of mortgage securities, a programme that is slated to end in about a month at some $1,250bn. The first hurdle is weaning the market off this money-printing exercise. That alone could lead to an unwelcome rise in mortgage costs. More daunting will be soaking up the excess cash created before it sparks inflation in the real economy.

The most straightforward and obvious method, selling the securities, would be likely to crush the mortgage market while wiping out its “profits” from the operation to date. Instead, it will be likely to soak up the excess funding in the banking system – a delicate task that could lower inflationary expectations and cement a recovery if done right or spark deflation if botched..."

Jakab goes on to discuss the problems of the likely losing positions on the US Treasury's bailout portfolio, and the fear over what will happen when these artificial props to the economy are removed.

In a housing & lending market now dominated by Fannie Mae and Freddie Mac, what happens when you can no longer maintain that taxpayer-funded level of support?

Related articles and posts:

1. Fed profits: $52 billion in 2009 - Fortune.

2. How the Federal Reserve earned its profit - Econbrowser.

Popular posts from this blog

Jesse Livermore: How to Trade in Stocks (1940 Ed. E-book)

If you've been around markets for any length of time, you've probably heard of 20th century supertrader, Jesse Livermore . Today we're highlighting his rare 1940 work, How to Trade in Stocks (ebook, pdf). But first, a brief overview of Livermore's life and trading career (bio from Jesse Livermore's Wikipedia entry). "During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly. Ironically, Livermore sometimes did not follow his rules strictly. He claimed that lack of adherence to his own rules was the main reason for his losses after making his 1907 and

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL!  Please bookmark our new web address at Financetrendsletter.com Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner .   Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead! As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter . You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter).  Stay up to date with our real-time insights and updates on Twitter .

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi