Wall Street banks weren't the only ones who had a pretty good 2010: the U.S. central banks also made a boatload of money. The Federal Reserve announced today that its net income was $80.9 billion in 2010. That's 51.5% better than its healthy 2009 profit of $53.4 billion. And there's good news for taxpayers here: they get $78.4 billion of it.
So why did the Fed do so well? You may have heard the phrase: you've got to spend money to make money. The Fed has been spending an awful lot of money over the past few years. Its balance sheet has swelled to over $2 trillion from less than $1 trillion in 2006. Almost all of that is in Treasury securities and government-sponsored enterprises (GSE) debt. Those are the sources where the lion's share of its profit came from. They accounted for $76.2 billion of its $80.9 billion profit. Other sources included a few billion dollars here and there from its financial crisis programs and interventions.
What does it mean that the Treasury gets this big cash infusion back from the Fed? It's a pretty good deal for the Treasury, as it essentially reduces its borrowing costs. The Treasury sells securities to the Fed. The Fed then creates money out of thin air to purchase them. The Treasury pays the central bank interest, and eventually buys back the par value of those securities. That leaves the Fed with the interest as almost pure profit, since it has essentially no borrowing costs. As a result, most of the interest becomes profit and goes back where it came from: to the U.S. Treasury.