The Federal Reserve is bankrupt

Recently, the American Institute for Economic Research (AIER) raised concerns about the financial position of the Federal Reserve and its potential impact on American taxpayers. The Fed’s balance sheet has experienced significant operating losses in the past six months, which have exhausted its existing capital. The losses represent foregone revenue to the US Treasury. The Fed expanded the money supply significantly to support a swift economic recovery in the post-pandemic period by purchasing vast amounts of US Treasury bonds and mortgage-backed securities. While those assets seemed like good investments at first, they are now a major hole in the Fed’s financial position. Currently, the Fed is paying about 2.85 percent per year more than it receives on its $8 trillion dollar securities portfolio which represents a loss of $228 billion per year. The most recent data show that the Fed owes the Treasury over $41 billion, which exceeds its total capital making The Fed, by common standards, indeed insolvent. The Fed creates fictitious accounts on the assets side of its balance sheet, known as “deferred assets,” to offset its increasing liabilities. Deferred assets represent cash inflows the Fed expects in the future that will offset funds it owes to the Treasury. The disadvantage is that it is further robbing the Treasury of revenues by deferring them into the future. Those deferred payments will be shouldered by American taxpayers until the Fed’s remittances resume. According to the Federal Reserve Act, the banks that are members of the Federal Reserve System could be forced to cover the capital shortfall. However, The Fed could return to a corridor system of monetary policy that results in lower interest paid on bank reserves and  Overnight Reverse Repo Facility (ONRRPs) relative to market rates and therefore fewer reserves held at the Fed. Shrinking the Fed’s balance sheet would make another Fed insolvency less likely, while also reducing the Fed’s footprint and the distortions it creates in the financial system.

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