Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely….
But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world’s most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.
“Could the Fed go broke? The answer to this question was ‘Yes,’ but is now ‘No,’” said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. “An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital.”
The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital.
The emphasis added is mine. And yeah, this is seriously a news article saying that the bank which can just make up money out of thin air is so bad at managing its finances that it had to make up a new accounting trick to stay solvent. That just lends so much credibility to those bills in your pocket, doesn’t it?
So uh…happy Saturday?Published in