FED´S POWER OF THE PRESS / THE WALL STREET JOURNAL ( VERY HIGHLY RECOMMENDED READING )

HEARD ON THE STREET

JANUARY 12, 2010, 5:12 P.M. ET.

Fed's Power of the Press .

By PETER EAVIS

The Federal Reserve's blowout 2009 profit is no reason to cheer. Rather, it is a reminder of the dangers inherent in the extraordinary policies the central bank has pursued during the credit crunch.

Last year, the Fed earned $52.1 billion, with most of that income coming from interest-payments on bonds that it bought during the year to shore up the economy and credit markets.

Anyone with access to printing presses could have racked up similar gains. But the Fed's purchases leave it exposed. Its assets are 43 times its capital, compared with 15 times at Goldman Sachs. As a result, its equity could be wiped out by just a 2.8% drop in the value of its Treasurys and securities issued by Fannie Mae and Freddie Mac. True, the Fed could hold on to those securities and ride out any losses, and retain earnings to boost capital, but what self-respecting central bank wants to risk a negative net worth?

Even the fact that the Fed is, as usual, paying most of its profit to the Treasury isn't good news. It means the Treasury is paying almost no interest on a large slug of debt purchased by the Fed. That can only chip away further at fiscal discipline.

The Fed's asset purchases did help avert a possible depression. But they've also weakened the dollar, fueled frothy assets markets, and stopped long-overdue adjustments to the economy and financial system. They could also stoke inflation if maintained too long. If these cons start to obviously outweigh the pros, the Fed's policies could quickly be discredited.

And since printing money is the last trick in its bag, its failure would take the central bank into dark, uncharted territory.

Something to think about as Fed cheerleaders compare the central bank's returns with those of Wall Street.

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