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The Fed Goes Into The Red

The continuing rise in Treasury yields means the Fed is losing money on the first leg of its $300 billion, 6-month plan for purchasing Treasurys, as well as its purchase of various mortgage-backed securities. Combine that with about $10 billion in unrealized losses from the toxic assets on its balance sheet courtesy of Bear Stearns and A.I.G., and the central bank is well on its way to reporting a loss for the first time in its history, according to IMF economist Peter Stella. (The loss is likely to be reported in 2010.)

But it's not necessarily a good thing for a central bank to earn a profit every year. The prime example of this comes from the worst years of the Great Depression, when the Fed still managed to eke out a profiit:

How did that happen? As per Stella (emphasis added):

How is it possible that despite extensive financial turmoil and bank failures the [Fed] managed a profit? The answer would appear rather straightforward—it took almost no risk on to the balance sheet.

This, in retrospect, is seen by many economists as a major mistake by the central bank, and one the current Fed is nowhere near repeating.

--Zubin Jelveh