Dead Man Walking: America’s Central Bank Is Bankrupt

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    by Eric Zuesse, The Duran:

    But the corrupt U.S. Congress will pass along to U.S. taxpayers its losses. That’s illegal, but what the law says, no longer matters in Washington.

    Here are the details:

    The U.S. Federal Reserve Bank, America’s central bank, now has a negative net worth, and Congress is therefore supposed to close it and the U.S. Treasury take it over, but is not expected to do so, but instead to pass the Fed’s losses onto the public, in the form of future tax increases — until the Fed becomes profitable again.

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    On April 14th, Thomas L. Hogan, Ph.D, a senior economist at the American Institute of Economic Research, headlined “The Fed Is Bankrupt” and he wrote that:

    I don’t just mean intellectually [bankrupt].

    Like a private bank, the Fed maintains some level of capital as a buffer against losses. When those losses exceed the value of its capital, the Fed becomes insolvent, meaning the liabilities it owes to others are greater than the total value of the assets it holds.

    The most recent data show that the Fed owes the [U.S.] Treasury over $41 billion, which exceeds its total capital. The Fed, by common standards, is indeed insolvent.

    Deceptively deferred assets

    What does the Fed do when its liabilities exceed its assets? It doesn’t go into legal bankruptcy like a private company [the Fed is owned by its member banks, and those member banks are private profit-making corporations; so, the Fed is indirectly privately owned] would. Instead, it creates [during the period while it is continuing to lose money] fictitious accounts on the assets side of its balance sheet, known as “deferred assets,” to offset its increasing liabilities [and resultant increasingly negative net worths].

    Deferred assets represent cash inflows the Fed expects in the future that will offset funds it owes to the Treasury. As the Fed describes, “the deferred asset is the amount of net earnings the Reserve Banks will need to realize before their remittances to the US Treasury resume.” …

    The Fed can continue its normal operations without disruption, [but] … at a time when the Fed is already worsening the US fiscal position by raising interest rates (and therefore interest payments on the federal debt), it is further robbing the Treasury of revenues by deferring them into the future. Those deferred payments, of course, must be shouldered by American taxpayers until the Fed’s remittances resume.

    His links included one to an article by two other respected economists, Paul H. Kupiec and Alex J. Pollock, who headlined on 23 June 2022, “Who owns the Fed’s massive losses?”, and they wrote:

    We estimate that at the end of May, the Federal Reserve had an unrecognized mark-to-market loss of about $540 billion on its $8.8 trillion portfolio of Treasury bonds and mortgage securities. This loss, which will only get larger as interest rates increase, is more than 13 times the Federal Reserve System’s consolidated capital of $41 billion.

    Unlike regulated financial institutions, no matter how big the losses it may face, the Federal Reserve will not fail. It can continue to print money even if it is deeply insolvent. But, according to the Federal Reserve Act, Fed losses should impact its shareholders, who are the commercial bank members of the 12 district Federal Reserve banks. …

    Under the Federal Reserve Act, member banks are also required to contribute funds to cover any district reserve bank’s annual operating losses in an amount not to exceed twice the par value of their district bank stock subscription. Note especially the use of the term “shall” and not “may” in the Federal Reserve Act:

    “The shareholders  of every Federal reserve bank shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such bank to the extent of the amount subscriptions to such stock at the par value thereof in addition to the amount subscribed.” (bold italics added).

    Perhaps if the law (that word, “shall”) were to be followed here, the burden upon the member banks that own the Federal Reserve Bank System, would cause some of those privately owned banks to go bankrupt, and, unlike with the Federal Reserve Bank, the members of Congress wouldn’t be able to rely upon a public misperception that the U.S. Federal Reserve system is part of the U.S. Government, and they would therefore have to say no to those banks when those banks will request taxpayer bailouts.

    The article goes on to note that the situation for the Fed will only get worse for the foreseeable future: “The Fed is paying rising rates of interest on bank reserves and reverse repurchase transactions while its balance sheet is stuffed with low-yielding long-term fixed rate securities. In short, the Fed’s income dynamics resemble those of a typical 1980s savings and loan.”

    So: the U.S. Congress, if it does what it is expected to do, will delay shutting down and placing under U.S. Government ownership, America’s privately owned central bank, and this will go on and continue delaying, until this ‘temporary’ problem will be over, the Fed’s socialization (Government ownership — nationalization of its central bank). The law’s “shall” will then have been ‘delayed however long it takes to do that. The Congress would then be waiting for ‘the business cycle’ to come back to the near-zero-interest-rates that would restore the market-values of those near-zero-interest-rate bonds that are in the Fed’s portfolio. However, between now and then, America’s taxpayers will absorb the mounting losses while interest-rates are continuing to be higher than they had been when the U.S. Federal Reserve bought those bonds.

    It should be noted that socializing a nation’s central bank is almost a routine occurrence in other countries, but part of America’s culture has been privatizing profits while socializing losses, and this is called “capitalism” and has become ideological here in order to boost the wealth of billionaires — who are the people that politicians need the most in order to be able to finance their electoral campaigns sufficiently to be able to win and keep public office in this country. Although socializing the central bank might be more just, it’s less profitable; so, the people who control this country don’t want that.

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