MacroScope

The fallacy of Fed ‘profits’ (and ‘losses’)

Richard Fisher, the Dallas Fed’s colorfully hawkish president, enjoys touting the remittances that the central bank makes yearly to Treasury, earned, circularly enough, mostly on the returns of the Treasury bonds the Fed holds. Here’s Fisher in September 2010:

All the emergency liquidity facilities that the Federal Reserve instituted were closed down and did not cost the taxpayers of this great country a single dime. Indeed, last year, as we finished up this work, the Federal Reserve paid $47.4 billion in profits to the Treasury. Imagine that! A government agency that (a) created programs that actually worked as promised, (b) made money for the taxpayers in the process and (c) undid the programs – all in the space of about 28 months – once they had done their job.

The amount has only grown since then, as the Fed expanded its asset purchases in an effort to support a subpar economic recovery, totaling a record $88.9 billion for 2012.

But for Bob Eisenbeis, a former Atlanta Fed economist now at Cumberland Advisors, any discussion about Fed “profits” is inherently deceptive. He explains in a research note:

That Fed remittances are considered profits is a total misrepresentation and a fiction. The Fed is part of the government and is not a private-sector, profit-making entity. (The Federal Reserve Banks are quasi-public, but the Board of Governors is a government agency, and the system’s debts are guaranteed by the government.)

from Jeremy Gaunt:

Getting there from here

Depending on how you look at it, August may not have been as bad a month for stocks as advertised. For the month as a whole, the MSCI all-country world stock index  lost more than 7.5 percent.  This was the worst performance since May last year, and the worst August since 1998.

But if you had bought in at the low on August 9, you would have gained  healthy 8.5 percent or so.

In a similar vein, much is made of the fact that the S&P 500 index  ended 2009 below the level it started 2000, in other words, took a loss in the decade.

from Global Investing:

The wealth effect in reverse

This chart shows losses in the Standard & Poor's 500 index since October 2007. Joseph Brusuelas, a director at Moody's Economy.com, said from the 2007 peak to the first quarter of 2009, U.S. stock holdings fell $7.6 trillion in real terms. "Our estimate suggests that through the end of March, U.S. stock wealth will have fallen by $66,000 per household," he said.

- Emily Kaiser