Monday, January 17, 2011

Is the Fed Broke?

Bob McTeer, former President of the Federal Reserve Bank of Dallas, argues that the Federal Reserve has no reason to mark to market its securities holdings:
First, there is no need for the Fed to mark to market since its assets are not held for trading and can easily be held to maturity or recovery if necessary
Curiously, he does not discuss what happens to his theory if it turns out some Fed assets are total junk and worthless. This could very well be the case. The Fed has still not told us all the collateral it loaned money out against during the financial crisis.

I hasten to add that this somewhat of an academic question, though, since the most important reason you need to know the value of assets on a balance sheet is to determine if they are greater than liabilities, to evaluate whether an organization will have the means to meet its obligations. This is not a problem with the Fed, since even if all its assets were worthless, it could still simply print new money to payoff its obligations.

That said, from a strictly accounting view, apparently one former Fed official thinks the Fed is near broke. McTeer reports on, but doesn't identify the official:
One such basher, a former Fed official who should know better, said on Cable TV that the Fed was broke or near broke because a rise in interest rates could easily wipe out the Fed’s capital if its assets were marked to market, which should be done in his opinion.
Again, this is strictly an accounting situation, but mark to market could prove highly embarrassing to the Fed, not only because of an interest rate increase caused decline in asset value but it would also highlight the junk that Fed may have indeed bought and maintains on its balance sheet at full value, when it's true value is nowhere close.


  1. How can a counterfeiter go broke? Did Zimbabwe? How about that Turkish Lira? Is "Lira" Greek for "Print Me"?

  2. I don't know how the Fed can be broke. They're the ones creating money right? A trillion dollars of it.

    I can understand, the Fed having crap for a balance sheet and how that can be very embarrassing, but I can't see bankruptcy happing for an organization with a printing press.

  3. The scrip Fed prints has less value than junk assets - at least those have some real component.

  4. Former Federal Reserve governor William Ford that is who he is talking about I would bet...

    Federal Reserve Leveraged Like Crazy, One Interest Rate Rise From Bankruptcy

  5. Ahh, I see if you consider FRNs that make up the monetary base as part of their liabilities, then the Fed could be bankrupt. I don't think bankruptcy has the same meaning that it does for the rest of us.

    When the Fed goes bankrupt, what it means is that the Fed has issued more FRNs than it can afford to buy back (by selling its assets). That means the Fed could not shrink the money supply beyond a certain point even if it wanted to. Depending on how bankrupt the Fed is, we could be seeing a permanently elevated monetary base. The one way the Fed might recapitalize is by receiving more T-bonds to sell.

    I'd like to know if that interpretation is on the mark or not.

  6. We talk about how the Fed whipped up a trillion bucks to hand to the bankers, as if that's the extent of their larceny. But this is a secretive, never-audited international cartel we're talking about-- the real number is probably mind-boggling huge. Sooner rather than later, those untold virtual fortunes swirling around the planet will come home to roost. At that moment, no amount of Fed contraction of existing currency will make a difference-- the system will reach critical mass, and we'll have a deflationary DOW and hyper-inflationary everything else.