Saturday, February 9, 2013

And what if the Fed were to make a loss?

Whether you think the Fed's actions have been successful or not in pulling the US out of a deeper recession, you have to admit that the gigantic increase in its balance sheet has been hugely profitable. US$88,900,000,000.00 last year. US$79,300,000,000.00 the year before. Despite what conspiracy theorists want to believe, this money is not going into the pockets of private bankers, but to the US Treasury, which is coming to rely on it in these trying budgetary times.

But these profits are not going to last forever. When the economy is going to do better, interest rates will have to be brought to saner, normal levels. And this is going to happen by selling the assets the Fed has accumulated, and this is going to happen at a loss, a substantial loss. Who is going to pay for it. Indeed, the Fed is not provisioning for losses, first because it never made a loss, second possibly because the law may prevent it from doing so. So if it makes a loss, what is going to happen? I could just print money to cover it, but that would run counter the very policy it is trying to implement. Or the US Treasury could cover the losses. I am not quite sure that it stands ready to do so. And in such a circumstance, conspiracy theorists would have a field day.

I have not seen anybody mention anything about the exit strategy of the Fed. So this is all personal conjecture. Am I missing something? The only positive aspect I see in this is that this seems to be an interesting revenue smoothing mechanism for the government. Or, once more, the Fed doing fiscal policy instead on the government.

1 comment:

mOOm said...

A lot of that interest is on government bonds, so the Treasury is paying itself. The net profit to the Treasury is less than the $80billion headline.