No. Not unless they forget how to operate that electronic printing
press of theirs (which doesn’t seem likely after the last couple
years), but that doesn’t stop people from questioning the solvency of
the Fed since boom-to-bust seems to be a recurring theme for the central bank
and they just handed over $78 billion in 2010 profits to the Treasury.
This Reuters story looks at some
of the particulars behind the question beginning with one of the more
interesting phrases used to characterize their recent activities –
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.
Along with its $66+ billion in Maiden Lane holdings (assets the Fed
bought as part of the Bear Stearns/JPMorgan (JPM) deal in 2008) that are guaranteed to produce a
loss, someday, when they are marked to something other than fantasy or sold,
about the only way the Fed can lose money is by selling debt securities in a
rising interest rate environment.
If it ever does
do that, it could easily lose hundreds of billions of dollars on its
portfolio that will soon reach $3 trillion. What’s funny is that, when
people talk about it they’ll say, “That’s
taxpayer money you’re losing there!”, but, the
money-printing-denier Fed Chief could then come back and say, “No. That’s not taxpayer
money. That’s just money we printed up”.