The title may have you thinking of which large well known bank I’m referring to. Bank of America? JP Morgan Chase? Deutsche Bank of Germany or the Bank of China? All would be good guesses, but the most profitable bank in the world is the United States Federal Reserve Bank.
The Federal Reserve is actually made up of 12 regional Federal Reserve Banks, all operating under the supervision of the Federal Reserve Board of Governors. It is this board of governors we hear so much about every month when they hold meetings to determine the level of short term interest rates in an effort to control the pace of the economy.
But the Fed, as it has become known, does much more than set the level of interest rates. Unlike commercial banks, which make money on ATM fees and making consumer and business loans, the Fed’s activities include the purchase and sale of bonds and currencies, loaning money to commercial banks and charging fees on other services.
And, as it turns out, it is quite good at these activities. During the last 10 years the profits of the Fed have ranged from about $18 billion to over $45 billion annually. The first six months of 2010 saw the Fed turn a profit of over $32 billion, which means that this year might be a record breaker for profits.
What’s the good news? Despite the disparaging comments often seen in the media regarding the actions of the Fed, the profits created by the organization are paid directly to the U.S. Treasury. In other words, as taxpayers we effectively own the Fed and benefit from the profits generated by its efforts. Unfortunately, even these vast profits aren’t enough to put a big dent in the high level of federal spending, but at least it is helping.
In the space we have here, it is hard to give a detailed explanation of the Fed and its activities. In brief, its mandate is to maintain price stability (control inflation) and maintain full employment. It also acts as a regulator of the banking industry. Opinions vary greatly on how the Fed is doing. Conspiracy theorists believe the Fed is illegal and should be disbanded. The facts are a little more simple and most developed countries have a central bank modeled after our Federal Reserve.
The Fed was created on Dec. 23, 1913, largely in response to a series of financial panics, particularly a major banking crisis in 1907. When we look back now, we can see that the success of the early Fed was mixed. Mistakes on monetary policy, viewed with the benefit of hindsight, made the Great Depression far worse than it would have been. In fact, for the first 50 years of the last century, the economy spent as much time in recession as it did in expansion.
In more recent decades, despite periodic setbacks, we have enjoyed long periods of economic growth and recessions have tended to be shallow and brief until the recent 2008–09 financial crisis and recession from which we are now emerging.
I would say the Fed has learned from past experiences and has also benefitted from the much better communication and technological tools available today. While we can look back and levy criticism at some actions it has taken from time to time, overall I believe the Fed rates a satisfactory grade on its performance.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.