By Colin Barr
January 10, 2011

The money-printing business has never been better.

In the latest sign of an economy addicted to artificial stimulus, the Federal Reserve on Monday posted a record $81 billion profit for 2010.

That’s more money than the entire U.S. banking industry has made over the past three writedown-soaked years. And unlike his counterparts on Wall Street, Fed chief Ben Bernanke doesn’t stand to get a big lump of restricted stock.

That may be for the best, given all the risks the Fed is taking on to generate those profits — including the risk of rising interest rates as the economy recovers, and the risk that another housing downturn will hit the value of the Fed’s massive mortgage portfolio.

The Fed’s earnings  jumped 56% last year, as a river of money pours into central bank accounts thanks to efforts to prop up a laboring U.S. economy by purchasing bonds.

Since the financial crisis started in mid-2007, Bernanke & Co. have nearly tripled the size of their bond portfolio. Even a sharp decline in interest rates since then hasn’t slowed the torrent of funds flowing into the Fed’s coffers.

The Fed said income on its debt holdings, comprising mortgage bonds issued by Fannie Mae and Freddie Mac as well as Treasury securities, surged to $76 billion last year from $49 billion a year earlier.

The Fed also made $7 billion running bailout programs, such as the Maiden Lane companies that facilitated the 2008 bailouts of Bear Stearns and AIG (AIG) and helped keep Wall Street from a complete implosion.

A decade ago, before the Fed inflated its balance sheet in a bid to keep funds flowing through the economy, the central bank’s annual profit was typically in the range of $25 billion to $30 billion.

The Fed turns over most of its profits to Treasury in weekly remittances from the 12 regional Federal Reserve Banks to the government. Those payments will total $78 billion for 2010 – up 70% from a year ago.

Those funds go into taxpayers’ pockets, though Monday’s news will hardly make the Fed more popular.

Critics charge that the Fed’s heavy hand in the bond market will make it hard for the central bank to remove its support when employment begins to rally and inflation becomes more of a threat. Already, the Fed’s support for the mortgage market has led to complaints that it is controlling the flow of credit in the economy.

And skeptics have long wondered what the Fed’s accounts will look like should we see a bond market panic like the one former Fed chief Alan Greenspan has taken to warning about.

A rise in interest rates reduces the value of bonds. A big enough rise could put the entire Fed balance sheet under water on a mark-to-market basis, though like most banks the Fed holds assets on the assumption it won’ t have to sell them.

And indeed, the Fed is currently under no great pressure to reduce its bond holdings or slim its balance sheet – the QE2 program that started in November does just the opposite.

But if the recovery picks up pace and rates go sharply higher, no annual profit numbers will be big enough to drown out all the righteous indignation about the Fed’s risky business.

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