Could The Federal Reserve Go Broke? - Bernanke Grilled By Senators Over Balance Sheet Losses
Jan 14, 2011 at 2:59 PM
DailyBail in balance sheet, bernanke, bernanke, fed, federal reserve, federal reserve, federal reserve investigation

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.

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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.

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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