The Federal Reserve trades government bonds -- and, more recently, other things -- primarily with a view to implementing policy. For example, it buys government bonds when it wants to expand the money supply and it sells them when it wants to contract the money supply. Its main goal is not to make a profit. But it acts with such skill that it usually does make a profit, and it's such a big operation that the profit is usually in the billions.
What happens to that profit? It goes back to the U.S. Treasury. And as the Post reports today, this year's profit is especially impressive: $45 billion, the highest amount in the bank's 96-year history.
Of course, part of the reason is that the Fed has been investing in riskier things over the last year. It's not just into humdrum U.S. government bonds anymore. So as would be true for any investor, higher risk can produce a better return. But it's still a higher risk, which might hurt the Fed (and therefore us) in future years. Still, a $45 billion return right now is pretty nice -- beats a sharp stick in the eye, as my father likes to say.
But why is Law Prof on the Loose caring about this? Faithful readers, this post is not really for you, but for that other, stranger part of my fan base, tax protestors. As you know, I am oddly fascinated with these unusual people who deny that any law actually requires payment of income tax. And recently, I have noticed that tax denial is increasingly linked to another set of strange beliefs, focused on the Federal Reserve. An increasing percentage of tax protestors also believe that there is something truly evil about the Fed -- that it's a cabal of bankers who secretly run our country (and the whole world, too) and are calling all the shots. And it's somehow responsible for the income tax -- income tax and the Fed were created at about the same time, and tax protestors somehow think that you couldn't have one without the other.
I'm not really expert on the Fed and I'm not in a position to say whether, on the whole, it is a good or a bad institution. But the tax deniers are into some truly ridiculous claims about it, the main one being that 100% of income tax revenues are used to pay interest on the national debt and therefore just go straight to the Fed. That is totally not true, as can be determined by just looking up the figures (unfortunately, looking things up is a skill many tax protestors lack): last time I checked, about 20% of income tax revenues got eaten up by debt payment, not 100% (it's probably more now, given how much extra borrowing the government is doing lately, but still a lot less than 100%), and besides, the Fed only owns a small percentage of U.S. debt anyway; most of it is in private hands.
Tax protestors also believe that the Fed is just a privately owned bank, that it charges interest on all U.S. currency, and that it is never audited. These myths are out of my realm, but a good web page on them can be found here.
Anyway, today's news story is primarily for the tax protestors. That Fed that you hate so much? It just handed $45 billion over to the U.S. Treasury. While Ben Bernanke, its CEO, pulled down a whopping salary of $199,000. Not a bad day's work.