/ world today news/ I have written more than once that in recent months the US Federal Reserve has started to show losses on a monthly basis. In the more than a century history of the US central bank, this has never happened. For the first time, the negative financial result of the Federal Reserve was registered in September of last year.
Then, for six months, the US Federal Reserve was forced to register negative financial results every month. This was no longer ignored by the US Treasury and the US Congress. Chronic losses mean that the US Central Bank stops transferring money to the treasury (according to the law, the amount of transfers is 90% of the profit received).
The Treasury Department is now especially nervous as the sources to replenish the US budget are quickly running out. And the finance department cannot resort to borrowing because the public debt has reached the ceiling” ($31.4 trillion). Here and the default is already close.
Many have already begun to pay attention to the critical state of the Federal Reserve. These are mostly experts, arrogantly called by some “marginals”. However, on April 14, an article appeared with the catchy title The Fed Is Bankrupt.
The author is Thomas L. Hogan, a senior fellow at the American Institute for Economic Research (AIER). The institute is part of the think tanks. The author has a rich record that suggests he is close to the Washington establishment. He has worked at Rice University’s Public Policy Institute, Troy University, West Texas A&M University, the Cato Institute, the World Bank, Merrill Lynch, and investment firms in the US and Europe. He served as Chief Economist for the US Senate Committee on Banking, Housing, and Urban Affairs.
In March, Jerome Powell spoke at a congressional hearing. He talks about the state of the economy, cryptocurrencies, proposals to fix commercial banking regulations, and even the climate. But he didn’t say a word about the state of the Fed itself. Thomas Hogan pointed this out: However, the Fed’s balance sheet is barely mentioned. Over the past six months, the Fed has suffered significant operating losses that have depleted its existing capital. These losses represent lost revenue to the US Treasury .
Thomas Hogan then repeats what others have said before him. It explains the origin of the losses. The Federal Reserve’s assets today are formed mainly thanks to the securities it purchased during the latest round of quantitative easing (QE) programs. That is, in 2020-2021, when the US Treasury in the context of the “pandemic” had to issue gigantic volumes of government securities purchased by the Federal Reserve.
As Thomas Hogan notes, the interest rates on these bonds are fixed and range from 1.5 to 2.0%. At the time, the Fed paid interest on passive operations (debts) of 0.15% or less. These were mainly bank reserve payments and overnight repurchase agreements (ONRRP). The interest margin (the difference in interest rates between active and passive operations) was quite decent, at the expense of which almost all of the Fed’s profit was formed.
Since the spring of last year, the Federal Reserve has slowed its QE policy and started sharply raising the key interest rate. This led to the fact that interest rates on passive operations (all of which are short-term in nature) immediately reacted to any increase in the Fed’s base rate. Thomas Hogan notes that by early April, rates had risen to 4.55% for ONRRP and 4.65% for bank reserves. But the asset rates remained the same as these are long term fixed rate securities. Interest margins turned sharply negative!
Hogan makes a rough estimate. It assumes that the average interest rate on bonds purchased by the Federal Reserve is 1.75% and the average interest rate on bank reserves and the ONRRP is 4.6%. The interest margin in this case turns out to be approximately minus 2.85%. The Fed’s securities portfolio is estimated at $8 trillion. That means the Federal Reserve’s annual loss equals $228 billion a year!
The losses of any bank do not mean that it is bankrupt. After all, it has equity (authorized plus reserve) to offset losses. Only if the total losses exceed the equity, then we can really talk about signs of bankruptcy. However, if it is a commercial bank, it can be rescued by the central bank, which is the lender of last resort and which can start the rehabilitation (recovery) of such a bank by issuing rescue loans.
And how are things at the Fed? Thomas Hogan writes: “The latest figures show that the Fed owes the Treasury more than $41 billion, which exceeds its total capital. By conventional standards, the Fed is truly insolvent. In other words, a candidate for bankruptcy. But apparently the government is not going to save (sanitize) the Federal Reserve at the expense of the budget. He doesn’t want to and he can’t.
US law does not provide for such a possibility as the Fed’s insolvency. Unlike, say, the PRC. There, in the law on the People’s Bank of China, it is written that in the event that the Central Bank of China incurs losses, they are covered by the state budget.
And the American bank in this emergency situation goes to the trick called “deferred assets“. That’s it “the amount of net profit that reserve banks will have to realize before their remittances to the US Treasury can resume.”
Thomas Hogan explains: “What does the Fed do when its liabilities exceed its assets? It does not go into legal bankruptcy as a private company would. Instead, he creates fictitious accounts in the assets of its balance sheet, known as “deferred /deferred/ assets”, to offset its increasing liabilities. “Deferred assets” can also be interpreted as a promise by the US central bank that it will cover its losses in the future.
In relation to commercial banks and even more so to companies from the real sector of the economy, such an instrument has never been used. The excess of the US central bank’s liabilities over its assets means that it is a net debtor relative to the rest of the country’s economy.
Hogan writes: Deferred assets represent the cash flow the Fed expects in the future to offset the funds it owes the Treasury. In this way, the US Treasury does not lend money directly to the Fed, but rather borrows it indefinitely.
The Federal Reserve’s losses erode public confidence in it. He dictates the rules for sound financial activity to more than four thousand banks that are members of the Fed, but he himself violates these rules in the most egregious way. At the same time, I am sure that no one will bankrupt him.
„ In addition to its role in managing the money supply, the Fed is the primary regulator of most US banks. If a private bank behaved this irresponsibly, regulators like the Fed or the Federal Deposit Insurance Corporation (FDIC) would force it to close. Bank managers will lose their jobs and incomes,” Hogan wrote.
The author of the article does not give a recipe for how the US Central Bank can get out of the current difficult situation. And most importantly, how to avoid such critical situations in the future. The article ends with the wish: “Fed leaders need to better manage their operations so they don’t drain the American taxpayer again in the future.” Now the article is actively spreading on social networks.
P. S. By the way, a similar problem arose for the Bank of Russia. Here are the data from the Bank of Russia’s annual reports on losses by year (billion rubles): 2017 – 435.3; 2018 – 434.7; 2019 – 182.7; 2020 – 61.5; 2021 – 26.3. Recently, the Central Bank published an annual report on the results of last year, from which it follows that in 2022 the loss of the Bank of Russia amounts to 721.7 billion rubles. The total loss is rounded – 1.8 trillion rubles.
If the Federal Reserve is recorded losses in the last six months, the Bank of Russia has recorded losses in the last six years. Unfortunately, this topic is bypassed in the leading Russian media. I considered this question in my article “Is it necessary to save the Bank of Russia?”.
Translation: EU
Subscribe to our YouTube channel:
and for the channel or in Telegram:
#Federal #Reserve #bankrupt #wont #bankrupt
