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« Wall Street Pay For 2010: A RECORD $144 Billion | Main | France & Germany say 'no increase' for EU bailout fund »
Friday
Jan142011

Could The Federal Reserve Go Broke? - Bernanke Grilled By Senators Over Balance Sheet Losses

New Slideshow - From Time Magazine - See a pic of Bernanke at age 13, hair slicked back, playing the saxophone - This is a True Must See 

 

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The Fed can't really go broke of course, not with the power of printing press, but this balance sheet is unlike any other before in the ignominious history of global central banking.

Related stories...

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Could the U.S. central bank go broke?

Source - Reuters

(Reuters) - The U.S. Federal Reserve's journey to the outer limits of monetary policy is raising concerns about how hard it will be to withdraw trillions of dollars in stimulus from the banking system when the time is right.

While that day seems distant now, some economists and market analysts have even begun pondering the unthinkable: could the vaunted Fed, the world's most powerful central bank, become insolvent?

Almost by definition, the answer is no.

As the monetary authority, the central bank is the master of the printing press. It can literally conjure up money at will, and arguably did exactly that when it bought about $2 trillion of mortgage-backed securities and U.S. Treasuries to push down borrowing costs and boost the economy.

The Fed's unorthodox steps helped it generate record profits in 2010, allowing it to send $78.4 billion to the U.S. Treasury Department. But its swollen balance sheet leaves the central bank unusually exposed to possible credit losses that could create a major headache at a time of increasing political encroachment on the Fed's independence.

  • Asked about the issue of potential losses during congressional testimony on Friday, Fed Chairman Ben Bernanke suggested the risks were minimal.  If liabilities on the Fed's balance sheet were to exceed its assets, it would only be so because of rising interest rates in the context of a thriving economy, he suggested.
  • "Under a scenario in which short-term interest rates rise very significantly, it's possible that there might come a period where we don't remit anything to the Treasury for a couple of years.  That would be I think a worst-case scenario," Bernanke said.  Customarily, the Fed submits surplus profits from its operations back to the Treasury's coffers.

But the Fed's newfangled policy steps and the potential for credit losses raises, for some experts, the prospect that the Treasury may actually be forced to "recapitalize" the Fed -- economist-speak for what others might call a bail-out.

That would be a strange role reversal given the Fed's efforts to ease monetary policy by buying the Treasury's debt, and it could raise a political firestorm from lawmakers who believed all along the Fed was putting taxpayer money at risk.

A PAUPER ON PAPER

Varadarajan Chari, an economics professor at the University of Minnesota and a consultant to the Minneapolis Fed, says that at some point during its exit from easy monetary policies, the Fed actually may go broke -- at least on paper.

"The most obvious exit strategy is, when inflation starts to pick up, to stop and reverse asset purchases," he said. "That's likely to include requiring the Fed in an accounting sense to see a significant accounting loss."

The Fed now holds just over $1 trillion in Treasuries, Chari noted, and if inflation rose by a couple of percentage points, it would dent the value of those holdings by about 10 percent, leaving the Fed with a $100 billion loss.

"I'm sure it will have some negative political fallout," Chari said. "But not economic consequences. Their ability to print money means it (insolvency) doesn't mean anything."

Continue reading at Reuters...

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Tim Geithner Says The United States Is Insolvent

 

Flashback: Obama Tells C-Span 'We've Run Out Of Money'

 

Bernanke On 60 Minutes: "We're NOT Printing Money"

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New Slideshow - From Time Magazine - See a pic of Bernanke at age 13, hair slicked back, playing the saxophone - This is a True Must See 

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Reader Comments (7)

Who Is "Third Way"? (Excusing Frauds In Foreclosure)

http://market-ticker.org/akcs-www?post=177258

[snip]

Oh I see. The people who caused the mess are front-and-center of this "think tank" and now wish to propose things that will allegedly "fix" the mess?
Jan 13, 2011 at 8:08 PM | Unregistered Commenterjohn
« Freedom Watch: Judge Napolitano With Ron Paul On Criminal Fraud By NY Fed & AIG Officials (VIDEO) »

http://dailybail.com/home/freedom-watch-judge-napolitano-with-ron-paul-on-criminal-fra.html
Jan 13, 2011 at 10:52 PM | Registered CommenterDailyBail
« Geithner: "I Never Had A Real Job" (VIDEO) »

http://dailybail.com/home/geithner-i-never-had-a-real-job-video.html
Jan 13, 2011 at 10:52 PM | Registered CommenterDailyBail
« WHAT WOULD KRUGMAN SAY -- A Fresh Look At New Zealand's Success SAVING Their Way Through Recession »

http://dailybail.com/home/what-would-krugman-say-a-fresh-look-at-new-zealands-success.html
Jan 13, 2011 at 10:54 PM | Registered CommenterDailyBail
Political heat may unite Fed, suppress dissent

http://www.reuters.com/article/idUSN1021964020110110
Jan 13, 2011 at 10:56 PM | Registered CommenterDailyBail
Speaking of things going broke, how about the 2 percent we are getting back on our checks from S.S payroll deduction?

S.S. is broke, so we are getting a 2 percent reduction in payroll taxes to make up for the shortcomings. This is that new math isn't it.

You just can't make up excuses for the designed implosion of the American system we are witnessing today, but don't worry, it is all just a coincidence.
Jan 14, 2011 at 6:23 PM | Unregistered CommenterS. Gompers

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