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January 18, 2012

Federal Reserve Profited $77 Billion From Junk Assets in 2011

In 2011, the Federal Reserve earned $77 billion in profits from its $2 trillion balance sheet. That's just under a 4% return. That's not too bad for an economy that is struggling to find investment returns. In fact, a 4% return is better than an index equity investment (flat in 2011) and a Treasury investment (3% at best).

So, what happened to the $77 billion? The Federal Reserve sent it straight to the Treasury.

Beyond Frustrating

On several occasions, we've called for the auctioning of the Federal Reserve's balance sheet in an effort to return these investments back into the hands of private owners and to ease the monetary glut we've created. The Federal Reserve has not and refuses to sell these assets to the public. Even if you or I wanted to buy a troubled asset, such as a mortgage backed security, from the Federal Reserve, we would be shunned.

Impact on Growth

Instead of selling these assets privately, and in this case, giving the economy a $77 billion boost in 2011, the Fed has socialized profits. Socialized profit is income earned by the government that is essentially destroyed by the government when it is placed in coffers and not given access to the distributive nature of the free market.

Had the troubled assets been in private hands in 2011, they would have generated roughly 0.5% of GDP growth ($77 billion divided by $15 trillion). Instead, the Federal Reserve denied that to the economy, much like they tried to deny the losses of the 2008 recession. $77 billion in private hands could have created jobs, increased private investment, aided consumption, and led to great returns.

Since we began defending the free market vigorously in 2008, few events have been more shocking, disturbing, and inherently wrong than this one.

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