A guaranteed fix for the budget deficit by Allan Sloan @FortuneMagazine July 31, 2012, 12:30 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — Okay, everyone knows that we’ve got big federal budget problems. Republicans aren’t willing to raise taxes to solve them. Democrats aren’t willing to cut benefits to solve the problems without taxes being increased, and maybe not even then. What to do? In the spirit of the late Jonathan Swift’s famous satirical essay, I’d like to offer A Modest Proposal to solve the problem: Get the Federal Reserve and the Treasury to start thinking like Wall Street and save us from our political inability to accomplish anything on the fiscal front. In true Wall Street style, I’ll show you a largely-overlooked source of federal profits, and show you how to exploit it. What I’m talking about is the little-known fact that the Federal Reserve is immensely profitable, and that its profits have grown rapidly since it began dealing with the world financial crisis that started in mid-2007. A second little known fact is that the Fed sends its surplus profits to the Treasury, which counts them as revenue the same way it counts income tax payments and such. The Fed is profitable because it creates money (as opposed to borrowing it, as other institutions do) and uses it to buy securities that pay interest at market rates. Pretty slick business model, right? Create money, then put it out at interest. MORE: Why Romney won’t defend private equity Because the Fed has vastly expanded its securities portfolio in an attempt to force down interest rates, both its profits and payments to the Treasury have zoomed. It sent $154.7 billion to the Treasury in 2010- 2011, more than $100 billion above the $54.6 billion it sent in 2005-06, the last two pre-crisis years. Its profits through mid-July match those of a year ago, $48.8 billion, so it’s on track to post record or near-record income for the third straight year. So far, profits have been a mere byproduct of the Fed’s bailout efforts. Now, in Wall Street fashion, let’s make Fed profitability an end in itself. First, we’ll have the Fed maximize its income by buying another $1 trillion or so of mortgage-backed securities, which would add about $25 billion to its annual profits. The Fed could also boost its profits by cutting or eliminating the interest (0.25% a year) that it pays on the cash that commercial and investment banks leave on deposit. And now, the big payoff. You’ve got profits soaring, crossing the magic $100 billion mark. Paying that extra money to the Treasury would alleviate some budget pressure, but we’re looking for a bigger score. In a world in which Facebook FB was valued at $100 billion (if only briefly), which was 100 times earnings, we can price a stellar performer like the Fed, which doesn’t have to worry about ad revenues, at 200 times earnings. (As long as the Fed doesn’t go public on Nasdaq, in which case let’s not bother.) MORE: Death of Bob Diamond’s dream for Barclays Do the math: that’s $20 trillion, enough to more than wipe out the national debt. We could keep control of monetary policy in the hands of the Fed’s Open Market Committee by giving it one Golden Share, while selling public investors shares that carry the right to the Fed’s surplus profits. When interest rates begin to rise again, the Fed’s profits will begin to fall. As will its stock price. But by then, we’ll have solved our budget problems, wiped out the debt, and done it by snookering people who will have bought into a Fed bubble the same way that millions of people bought into the tech-telecom stock bubble and the housing bubble, and will buy into bubbles yet to come. It’s the American way. And the Wall Street way. Now, for my fee. In return for this idea, I expect a modest, tax-exempt payment of 0.01 of 1% of the Fed’s market value. Send it to me c/o Fortune magazine, and I’ll invite you to my retirement party, which will take place the day after the check clears. A FINAL WORD: You realize, I hope, that this column IS A SATIRE, Just as Jonathan Swift’s “A Modest Proposal,” which I mentioned in the second paragraph, was a satire. Swift wasn’t really proposing that poor Irish families sell their children for use as food—but some people thought he was serious. And in these crazy, contentious days, who knows? If we republished Swift’s opus under another name and title, some people might well consider it to be a seminal piece of laissez-faire economic thought.