Can the Fed Go Bankrupt?
Former Atlanta Fed President William Ford says, technically, yes, the Fed can go bankrupt. He argues that the Fed’s balance sheet is highly leveraged as a result of quantitative easing expanding its balance sheet. The result is that the Federal Reserve is thinly capitalized despite its having just transferred a record $80 billion in profit to the US Treasury. Ford says that this creates a situation in which the Fed would be technically insolvent on a mark-to-market basis if interest rates were to go up 1%.
My take: there is certainly a ‘political’ element to this analysis, namely a desire to rein in the Federal Reserve. But, clearly, the side effect of the Fed’s extreme leverage, the opacity with which it operated during the crisis, and its having bought lower quality assets is that political forces are coming to bear which will restrict its ability to act as aggressively as I believe it will want to during the next downturn. Remember, Ford is a former Fed President. So his view has more credibility in policy circles. Note his comments regarding the lack of GAAP accounting at the Federal Reserve. This is certainly something to keep in mind regarding likely future monetary policy.