Will Bernanke’s Fed Bankrupt Itself?

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And if it does, who will be stuck with the bill?

The article below estimates that the Fed has recently lost $200 billion in market value on its government securities because of rising interest rates. It does not discuss other securities owned by the Fed which may have declined even more in value. Because of Fed secrecy, no one knows about that. After losing this estimated $200 billion in market value, the Fed has $62 billion of capital left to cushion itself against any further losses.

It is unlikely that the Fed will ever sell the securities it has bought since 2008 with newly printed money. It knows that the private market or other central banks would not be able to absorb them. Because of its accounting conventions, it will only recognize a loss if it sells, which is another reason sales will not take place. However, the Fed claims that it will sell if the economy improves, and as we have noted in earlier pieces, it would have to sell half of all the securities it has bought just to bring interest rates back to 2%.

This 2% level is important because it is the level at which distinguished economist Steve H. Hanke estimates that banks would have an incentive to start lending to each other which would in turn increase banks’ willingness to lend to small businesses. As Hanke points out, the Fed’s ultra low interest rates have not made credit easier for small businesses, but have instead created an unintended and unnecessary credit crunch.

The article below talks about the possibility of an impotent Fed if it runs out of capital. But that is not quite correct. A few years ago, the Fed quietly issued a memorandum in which it stated that any bond losses the agency suffered would be made up by the Treasury, that is by the taxpayers. It is hard to believe this would be constitutional, since it would be another example of spending without prior Congressional approval, something forbidden by the Constitution. But our government and courts don’t seem much concerned about constitutional law these days. So if the Fed’s radical policies lead to bankruptcy, you and I as taxpayers can expect to be stuck with one more gigantic bail-out.

Click here for the article