The Mickey Mouse Economics Of The Federal Reserve, Part 1

One of these days, folks who are even minimally literate financially will be asking a question: Namely, how in the world did the Federal Reserve—an institution that has an unbroken record of being wrong on virtually every financial forecast it has ever made—nevertheless manage to rack-up cumulative profits of $856 billion over the last decade?

As we explain below, the nearly trillion dollar “profit” displayed in the chart is about as close to Mickey Mouse economics as you can get. It couldn’t possibly have resulted from the operations of a legitimate financial institution—one where its income and expenses have a reasonable or even plausible relationship to its balance sheet assets and liabilities.

After all, banks make money by squeezing slightly more income out of their assets than the expenses they must pay on their equal and offsetting liabilities. This difference is known as the “net interest margin”, which is then available to cover operating expenses and profits.

Here’s the thing, however. Were the Fed a legitimate financial institution in 2021, it’s $117 billion of net interest income (reduced to the net profit of $109 billion shown below owing to $8 billion of operating expense) would have required $3.35 trillion of gross interest income at the US banking system’s average 3.5% NIM (net interest margin).