This year a series of regulatory, compliance, and legislative changes will occur that will affect small business owners. Here's a rundown of what to expect. Full Article
WASHINGTON/CHICAGO | Tue Jan 11, 2011 9:30am EST
WASHINGTON/CHICAGO (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."
Many economists argue that the potential cost to the taxpayer from the Fed's policies is far smaller than the threat of a prolonged period of economic stagnation that would result from a less proactive approach.
Incredible that none of these economists mention that the Fed grossly overpaid for a trillion in mortgage backed securities, and could face losses of hundreds of BILLIONS when it tries to sell them.
If it “just lets them run off” it will incur the losses as mortgagees default
How does the Fed go broke when it doesn’t have any debt?
It doesn’t own anybody anything. By definition, it cannot default, because it does not owe anybody anything.
If it sells it’s bonds at a ‘loss’, the money it generates in the sell is pure profit.
The Fed would most likely be driven to sell it’s bonds when inflation takes off, and if interest rate hikes are not effective at lowing the inflation. In this scenario, the Fed could sell it’s tresuries at a discount in order to soak up all the excess cash in the system. The Fed does not have to ‘pay back’ this cash because it does not own the money to anyone. The Fed would simply destroy the cash… ashes to ashes, dust to dust… from whence it came.
The only alternative to ‘burning’ the cash would be to give it to the government (aka what it has elected to do currently). However, this would not be an option under a high inflation scenario, because this act would empower the goverment to expand spending, which would worsen the inflation.
My hunch is that inflation will too bad, and the treasury will end up selling half it’s portfolio, giving the 1/2 trillion to the Treasury, which would be just enough to the Entitlement system limping along into the sunset.
The central bank isn’t the entity that is going to go broke. The US Dollar is going to be worth nothing once the trillions of dollars the Federal Reserve has printed funnels through the economy. Americans are going to experience hyperinflation at Weimar Republic and Zimbabwe levels because of the Fed’s actions.
It’s a shame US citizens allow the Federal Reserve to devalue their dollar. Americans need to research the Federal Reserve and wake up before it is too late: http://www.unelected.org
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