Bailing out the Fed

Case in point—the US Federal Reserve recently published a paper entitled, “When Does a Central Bank’s Balance Sheet Require Fiscal Support?”

Translation: how bad do things have to get at the Fed before they need to be bailed out by the federal government?

Remember that the Federal Reserve is ultimately the issuer of the United States dollar. In fact, you’ll notice when you look at your ‘money’ it says ‘Federal Reserve Note’ on the face.

And over the last several years, the Fed has engaged in the most extraordinary program of expanding its balance sheet.

They’ve essentially conjured new dollars (notes) out of thin air and given them to banks in exchange for all the toxic assets that blew up in 2008, along with trillions of dollars worth of US government debt.

What remains for the fed—the bank’s “net worth”—is razor thin. At this point it’s less than 1.3% of its total assets. This is a laughably tiny margin of safety.

It means that if the value of the trillions of dollars worth of assets that the Fed is holding happens to fall by just 1.3%, then the Fed will be bankrupt.

1.3% is nothing. Most people’s investment portfolios go up and down more than that in a single day.

Jamie Dimon (CEO of JP Morgan) pointed out that Treasury yields moved 40 basis points in a single day last October. So, yes, this absolutely can happen.

But the Fed isn’t worried.

In its latest paper, they say that while it is *possible* that their net worth could become negative, such a phenomenon would be “temporary and would not create serious problems.”

What a convenient assumption.

In other words, the issuing authority of the United States dollar and one of the largest financial institutions in the world thinks it’s no big deal if it goes broke.

How can they possibly justify such madness? Simple. They have pages and pages of complex mathematical models and differential equations to back it up.

Simon Black