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Federal Reserve: The nation's most profitable bank

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Manuel Balce Ceneta/AP

(Read caption) Federal Reserve Chairman Ben Bernanke takes part in the International Monetary and Financial Committee meeting at the IMF/World Bank annual meetings in Washington. US banks are losing revenue, but the Federal Reserve grows bigger during bad economic times, the author argues.

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All is not well in bankland, despite the industry earning $28.8 billion in the second quarter, nearly $8 billion more than a year ago. Earnings have improved for eight quarters in a row. Not so coincidentally, loan-loss provisions fell by $21.4 billion from the second quarter of last year. So any grow in earnings is from setting aside less money for bad loans. Banks figure the worst is over.

Revenues for the nation’s banks were lower for the second consecutive quarter and Bank of America and others are trading at a fraction of book value, which means the market believes there are more write downs and losses to come.

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But those numbers don’t include the nation’s central bank–the Fed. The Fed is making money was printing the stuff.

In his “Contrary Indicator” column, Daniel Gross writes half the story,

The Fed doesn’t make money the way regular banks do — by charging ATM fees and making mortgage and credit card loans. Rather, it collects interest on the securities it acquires, by lending money to banks, and by charging fees for certain services.

What he doesn’t tell you is that the Fed’s cost basis in these securities and loans is zero. Bernanke and company have a bottomless checkbook. Money for nothing.

So as long as the entities that borrow from the Fed pay their interest, “this is a business so easy even bankers could make a profit doing it.”

And the central bankers at the Fed do just that. It used to be the Fed made a steady $20-$30 billion year in and year out. Then came the meltdown, and the Fed’s balance sheet melted up.

The central bank’s earnings rose to $53.4 billion in 2009 and jumped again to just short of $82 billion in 2010.

Gross figures the Fed to make even more this year. Bernanke’s balance sheet foots to $2.83 trillion, with $2.6 trillion of that in securities. “And through September 29, the next-to-last day of Fiscal 2011, Fed earnings had contributed $82.5 billion in revenues to the government for the fiscal year, according to the Daily Treasury Statement,” writes Gross.

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The central bank has a long way to go to cover the federal government’s $1.3 trillion deficit. But Bernanke has plenty more bailing out to do, which will mean a bigger balance sheet and more earnings.

A bigger Fed plus more TARP (which was reportedly profitable) means the deficit problem can be licked in no time.