LA Times: Federal Reserve May Be Headed for a Taxpayer Bailout
Friday, 01 Nov 2013 08:38 AM
By John Morgan
The Federal Reserve has been priming the pump, manning the printing presses, spiking the punch and otherwise driving up the U.S. stimulus tab with abandon since the 2008 financial meltdown, perhaps exhausting fresh metaphors with its open-wallet policies.
But what happens when the bill comes due, especially if rates — and thus government debt — go up unexpectedly?
According to the Los Angeles Times, the Fed's debt has grown to such epic proportions, nearing a boggling $4 trillion, that it may need eventually need a taxpayer bailout. (Talk about too big to fail!)
"It's really pretty cut-and-dried as far as the arithmetic goes: If you buy bonds and interest rates go up, you're going to take a capital loss on those bonds," said James Hamilton, an economics professor at University of California, San Diego. "The more they buy, the bigger their balance sheet, the bigger the loss they're going to face."
Fed Chair Ben Bernanke has said no problem, America, because any losses incurred by the Fed would be canceled out by more than $300 billion in interest earned on its expanded holdings in recent years.
Not everyone is so confident in that happy outcome.
Marvin Goodfriend, an economics professor at Carnegie Mellon University, said the Fed's massive borrowing has been profitable in the short term, because the long-term bonds the Fed purchased earn about 2.5 percent interest, while it only has to pay 0.25 percent on the money used to purchase them.
"The borrowing cost is cheap right now," Goodfriend told the Times. "Those borrowing costs are going to rise."
Rep. Mick Mulvaney, R-S.C, voiced Republican fears that if rates rise to the point the bonds are upside down, the results could be catastrophic.
"The Fed stands to lose a lot of money, and by a lot of money, I mean hundreds of billions of dollars," Mulvaney warned. "It is not hyperbole to suggest the next big bailout could be of the Federal Reserve."
Bloomberg News recently estimated the market value of the Fed's holdings could drop by $547 billion over three years during a "worst-case" economic dive in which interest rates jumped sharply.
Forbes contributor Cedric Muhammad, an economist and CEO of AfricaPrebrief, wrote in a column that Congress should withhold the confirmation of Janet Yellen as Bernanke's successor unless there is an audit first of the Fed's books.
Muhammad wrote the notion "that the Federal Reserve system should be exempt from any kind of audit can only be viewed as benefiting the elite interests of a banking sector that both sides of the aisle should agree enjoys a privileged monopoly only because Congress erroneously (but not permanently) forfeited its Constitutionally mandated authority over the nation's finances."
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Poster Comment:
The ultimate insult to all of the slaves. ;)