Tricky...

Big news last week... Our leaders saved the economy from collapse and turned us a profit on all that bailout $ at the same time... Yes, we're out an estimated 60 billion bills on TARP... However the Fed's making money hand over Geithner's (braggadocio) fist... The net estimated gain on all those taxpayer dollars thrown at all corners of the crisis is somewhere between $10 billion and $100 billion (now that's a big somewhere between)...

It's Bernanke and company, those incredibly intelligent scholars that saved our bacon... Of course the complexity of what they pulled off is mind boggling, but I'll do my best to describe their intricate seven-step process for you here...

Step 1: Print money (euphemism for adding digits to the Fed's checking acct)...
Step 2: Buy debt securities from financial institutions...
Step 3: Collect the interest on those securities...
(Stop here for a sec: 1-3 seem simple enough, but when the economy didn't respond, that's when they had to dig deep and get really creative)...
Step 4: Print more money...
Step 5: Buy more debt securities from financial institutions...
Step 6: Collect the interest on those securities...
Step 7: Pay their profits to the treasury...

Amazing!! And what are those instruments they're buying? Mortgage Backed Securities and U.S. Treasury Debt...

Now wait a minute; the Fed pays its profits to the Treasury - and a great deal of those profits come from Treasury debt? So the taxpayer pays interest on the debt to the Fed, the Fed books that as profit, then pays it back to the Treasury? And it's heralded as a win-fall to the taxpayer? Hmm... Tricky...

So now what happens? Well, the Fed now sports a nearly $3 trillion portfolio of fixed income securities... And because of all the Fed buying of bonds, interest rates remain phenomenally low... When (not if) bond investors (other than the Fed) say enough's enough and look elsewhere, interest rates will rise... And what happens to bond values when interest rates rise? They fall... Hmm... a little conflict of interest maybe???