The Federal Reserve != the U.S. Treasury

The U.S. Treasury turned a profit on TARP. TARP debits and credits work just like any other government expenditure.

A lot of pundits lump TARP with the Federal Reserve's quantitative easing (QE) program. QE was a program where the Federal Reserve itself purchased assets (mortgage securities, bonds, etc). The assets to purchase these were much more akin to printing money, I suppose. And this program was much larger than TARP in dollar value. This asset purchase program has turned a profit for the government because dividends, resales, etc, have exceeded the outlays. The Federal Reserve must, by statute, transfer such profits to the Treasury.

I say "I suppose" because _anybody_ can print money. For example, I can give you an IOU in exchange for gold bars. You can then put that IOU on your books as an asset, which in turn allows you to borrow against it, perhaps getting even more gold bars of your own if you can convince others the IOU was worth more than you paid. We got into this mess because the investment banks were, conceptually, printing money by assembling mortgages into securities and then reselling or borrowing against the securities for a price (in retrospect) far greater than the long-term return of the underlying assets. Derivatives markets then multiplied the differential many fold. In all these cases nobody actually prints currency notes; nonetheless, the total dollar value of assets on the books has increased.

I don't think it's very useful to equivocate all these financial machinations. Papering over them is precisely how we got into this mess.[1] And while I guess it's fair to say that the Federal Reserve can print money, the implications of that are neither clear nor inevitable. The Federal Reserve has a legal mandate to keep inflation rates low. Often people are trying to allude to the specter of hyperinflation. But it's worth remembering that the hyperinflation in Weimar Germany was very much _intentional_. The Germans pursued hyperinflation to spite the WWI allies, as it allowed them for a time to minimize the effect of war reparations on their domestic economy (if they printed money fast enough, they could purchase foreign currency before the official exchange rates reacted[2]). Eventually it became something that they were, politically, unable to roll back. Hyperinflation in Zimbabwe was a self-fulfilling prophecy, and a symptom of a failed state, similar to the tail end of the Weimar Republic.

Note that in both cases these events were fundamentally driven by politics. If the Federal Reserve ever got itself into a situation where it couldn't stop pumping assets into the system, it's almost certain that it would have been preceded by Congress first changing the laws. Currently the Federal Reserve is substantially (though not completely) independent from political forces. In any event, if the Federal Reserve ended up in that sort of situation it would undoubtedly be symptomatic of much larger problems in the country.

[1] Thinking they're unnecessary and could be done away with is naive. The book-value of assets will always involve guess work because it requires people to quantify the likelihood of future events based on imperfect information about the present. And there will always be mechanisms that compound errors in this guess work. The way you control systemic risk is through diversity and uncoupling.

[2] Ironically, the gold standard made this arbitrage both feasible--it took longer for individual exchange rates to react--and was a central cause--the gold standard caused severe deflation across Europe. Deflation sucks for debtors, and war reparations made Weimar Germany the biggest debtor of them all.

Why severe deflation across Europe? It coincided with the apex of the industrial revolution in the U.S. The U.S. was pumping out radios and refrigerators like crazy, and Europeans were buying them up like hot cakes. Because everybody was on the gold standard, and because every central banker refused to readjust their exchange rate with gold, increasing amounts of gold in all the central banks in Europe were credited to the U.S. account balance. That meant less gold per unit of national currency, which meant deflation. The way inflation in the U.S. occurred is that Europeans began purchasing U.S. securities, because each unit of domestic currency purchased increasing amount of American dollars. Likewise, repatriated profits were dumped into the stock market. This is how the gold standard directly precipitated the stock market crash of 1929.

Something similar is happening between China and the U.S., except that the U.S. dollar is a floating currency and China is attempting to avoid domestic inflation by preventing the repatriation of assets (that is, China effectively forces producers to invest their profits in U.S. securities). The end result is that deflation is blunted in the U.S., but it's a huge reason why despite QE we haven't seen much inflation.