What happens if the fed loses money?

[cubical]

The losses are transfered to the treasury, right? I am just wondering what happens if the fed were to raise rates and cause their bond assets to fall below the price they purchased them at.

Seems like not only will the fed not raise rates because it would cause another depression, but it would also lose money on its holdings. Granted they could raise them slow enough as to not have this happen, but if we started to enter into heavy inflation, would they have a choice.

Thanks for the knowledge.

 

[Chester Copperpot]

The losses are transfered to the treasury, right? I am just wondering what happens if the fed were to raise rates and cause their bond assets to fall below the price they purchased them at.

Seems like not only will the fed not raise rates because it would cause another depression, but it would also lose money on its holdings. Granted they could raise them slow enough as to not have this happen, but if we started to enter into heavy inflation, would they have a choice.

Thanks for the knowledge.

Since theyre never audited I doubt we never know what the value of their holdings are. What they pay, their terms of repayment, and any other dealings like that.

 

[AdamT]

They print more of course.

 

[Seraphim]

Sadly, this. They print it up and sell the bonds (government debt) to any takers - when there are no takers, the central bank comes in and starts buying it's own debt (like The Fed does now).

Most people are still in tune with the Chinese and Japanese owning a lot of US debt, but the The Federal Reserve has surpassed them now.

They print more of course.

 

[AceNZ]

The losses are transfered to the treasury, right?

Normally, Fed profits are rebated back to the Treasury. There is no standard mechanism for handling a loss, since it's never happened.

The Fed can only create debt. It can't create capital -- not for other banks, and not for itself. That means it can't simply "print more" to resolve a loss. Printing involves swapping newly-created money for a debt instrument, such as Treasury security. Both sides of the balance sheet are affected; the new money becomes a liability, and the debt instrument an asset.

If the asset side of the balance sheet were to plummet in value to the point where the Fed would have a loss when those assets were sold, the first step would be to defer those sales as long as possible (this is already happening). If the loss is actually realized, it could be offset to some degree by the Fed's massive profits. That would reduce or eliminate the Fed's annual rebate to the Treasury.

For losses beyond that, the Treasury would have to step in, and add capital to the Fed by creating new, debtless money (a bailout) -- true one-sided printing. To do so would almost certainly require an Act of Congress.

FWIW, this is exactly how many previous central banks have failed -- and why some people believe the Fed will eventually fail as well.

 

[cubical]

Normally, Fed profits are rebated back to the Treasury. There is no standard mechanism for handling a loss, since it's never happened.

The Fed can only create debt. It can't create capital -- not for other banks, and not for itself. That means it can't simply "print more" to resolve a loss. Printing involves swapping newly-created money for a debt instrument, such as Treasury security. Both sides of the balance sheet are affected; the new money becomes a liability, and the debt instrument an asset.

If the asset side of the balance sheet were to plummet in value to the point where the Fed would have a loss when those assets were sold, the first step would be to defer those sales as long as possible (this is already happening). If the loss is actually realized, it could be offset to some degree by the Fed's massive profits. That would reduce or eliminate the Fed's annual rebate to the Treasury.

For losses beyond that, the Treasury would have to step in, and add capital to the Fed by creating new, debtless money (a bailout) -- true one-sided printing. To do so would almost certainly require an Act of Congress.

FWIW, this is exactly how many previous central banks have failed -- and why some people believe the Fed will eventually fail as well.

If the treasury took the loss they could just pay it with tax revs. They won't have to create money. I fed could simply let the bonds mature, though they would be powerless to stop inflation as they won't be able to sell their assets.

 

[AceNZ]

If the treasury took the loss they could just pay it with tax revs. They won't have to create money. I fed could simply let the bonds mature, though they would be powerless to stop inflation as they won't be able to sell their assets.

All Federal tax revenues are already spoken for -- remember the debt ceiling and all that? Any new spending can only be done by either borrowing or money creation, and if the Fed was on the verge of failure, then borrowing would no longer be an option. Besides, if the Fed fails, the amount of money needed to bail it out is likely to be way beyond annual tax revenues; possibly trillions. Just to soak up the Fed's current annual earnings would require a loss of $70B per year.

The Fed hold many assets other than bonds, including things like mortgage backed securities. They have more freedom to buy-and-hold with some assets than others.

 

[freshjiva]

Profit-making is never a motive for the Fed since they control the money supply.
The Fed is truly an outsider in the sense that its decisions are not driven by understanding market forces and thereby attempting to reap capital gains.

This was proven by the Fed's asset purchasing program and the first round of QE. They intentionally bought up worthless assets to prop up Bank of America, Citigroup, and Goldman Sucks.

They're not interested in profit making because they simply don't have to!

 

[Carson]

They print more of course...

and send us the bill.

 

[Carson]

Profit-making is never a motive for the Fed since they control the money supply.
The Fed is truly an outsider in the sense that its decisions are not driven by understanding market forces and thereby attempting to reap capital gains.

This was proven by the Fed's asset purchasing program and the first round of QE. They intentionally bought up worthless assets to prop up Bank of America, Citigroup, and Goldman Sucks.

They're not interested in profit making because they simply don't have to!

I wouldn't buy a story like that one. They are a private bank. I've heard those stories before and I've also heard that they return profits over 6%. I think that not only can our government print up what ever it takes to get their way the system itself allows others out side of our government to print up what ever it takes to get theirs also.

Certainly not what I would ever consider a republican form of government.

 

[hugolp]

If the Fed has loses it can NOT print money to make up for it without the approval of the congress. This is the reason Bernanke has recently changed the accounting rules and will account loses as treasury negative pasive (its a trick to avoid asking permission to the treasury). What this means is that the Fed wont return benefits to the Treasury until the loses have been compensated.

What does this mean for you? Inflation.

I wouldn't buy a story like that one. They are a private bank. I've heard those stories before and I've also heard that they return profits over 6%. I think that not only can our government print up what ever it takes to get their way the system itself allows others out side of our government to print up what ever it takes to get theirs also.

Certainly not what I would ever consider a republican form of government.

The Fed is not a private institution. Please lets stop this stupid internet meme.

 

[cubical]

All Federal tax revenues are already spoken for -- remember the debt ceiling and all that? Any new spending can only be done by either borrowing or money creation, and if the Fed was on the verge of failure, then borrowing would no longer be an option. Besides, if the Fed fails, the amount of money needed to bail it out is likely to be way beyond annual tax revenues; possibly trillions. Just to soak up the Fed's current annual earnings would require a loss of $70B per year.

The Fed hold many assets other than bonds, including things like mortgage backed securities. They have more freedom to buy-and-hold with some assets than others.

Well in the current environment, yes. But theoretically they could use tax revs to pay the feds losses.

 

[cubical]

If the Fed has loses it can NOT print money to make up for it without the approval of the congress. This is the reason Bernanke has recently changed the accounting rules and will account loses as treasury negative pasive (its a trick to avoid asking permission to the treasury). What this means is that the Fed wont return benefits to the Treasury until the loses have been compensated.

What does this mean for you? Inflation.



The Fed is not a private institution. Please lets stop this stupid internet meme.

Ah, so the fed can now run deficits? Makes sense. They can guarantee a profit if they truly needed to.

 

[AmericasLastHope]

The Fed is not a private institution. Please lets stop this stupid internet meme.

This is from the Federal Reserve's own website...

"Congress chartered the Federal Reserve Banks for a public purpose. The Reserve Banks are the operating arms of the central banking system, and they combine both public and private elements in their makeup and organization."

http://www.federalreserve.gov/pf/pdf/pf_complete.pdf

 

[hugolp]

Ah, so the fed can now run deficits? Makes sense. They can guarantee a profit if they truly needed to.

I dont know if I would call that deficits, but yeah. It wont return benefits to the Treasury until all the loses are compensated. The funny part is that a lot of keynesians were saying that the Fed had a credible exit strategy and that the people denying it were wackos (typical keynesian arrogance). Then quietly at the beginning of this year the Fed announced this accounting change, which is an admision that they can not pull back, and all the keynesians quickly changed the discourse. A lot of them admited that it was obvious, but that Bernanke needed to lie to keep expectation in check... These keynesians actually admited that they advocate lying to the people as policy.

This is from the Federal Reserve's own website...

"Congress chartered the Federal Reserve Banks for a public purpose. The Reserve Banks are the operating arms of the central banking system, and they combine both public and private elements in their makeup and organization."

http://www.federalreserve.gov/pf/pdf/pf_complete.pdf

So basically you are confirming its not a private institution.

 

[cubical]

Normally, Fed profits are rebated back to the Treasury. There is no standard mechanism for handling a loss, since it's never happened.

Can you or anyone else explain to me this; if the fed has never lost money, then why are there so much more dollars now in circulation compared to 1913. It is simply because the fed's balance sheet keeps moving higher and higher?

 

[hugolp]

Can you or anyone else explain to me this; if the fed has never lost money, then why are there so much more dollars now in circulation compared to 1913. It is simply because the fed's balance sheet keeps moving higher and higher?

Yes.

The Fed has two basic ways of expanding the money supply. One, lending money to banks (discount rate, manipulating federal fund rate, etc...) and, two, monetizing government debt. The first way, it creates debt so its only "temporary" (it helps banks expand credit), the second way, its definitive and it consolidates the expansion of the money supply. The fact that the Fed buys treasuries, which is a debt, confuses a lot of people, but because the Fed will keep renewing the debt and returning the interest payments to the Treasury its not real debt. When the Fed monetezices government debt its roughly equivalent to the government printing money.

 

[cubical]

Yes.

The Fed has two basic ways of expanding the money supply. One, lending money to banks (discount rate, manipulating federal fund rate, etc...) and, two, monetizing government debt. The first way, it creates debt so its only "temporary" (it helps banks expand credit), the second way, its definitive and it consolidates the expansion of the money supply. The fact that the Fed buys treasuries, which is a debt, confuses a lot of people, but because the Fed will keep renewing the debt and returning the interest payments to the Treasury its not real debt. When the Fed monetezices government debt its roughly equivalent to the government printing money.

But both of these seem to be just increasing the balance sheet of the fed. Even though the fed keeps buying government debt, the government still has to "pay" itself to cancel out the "debt". It is more like an interest free loan, but the loan still has to be paid.

 

[hugolp]

But both of these seem to be just increasing the balance sheet of the fed. Even though the fed keeps buying government debt, the government still has to "pay" itself to cancel out the "debt". It is more like an interest free loan, but the loan still has to be paid.

But the bonds will always be renewed. If you check the balance sheet of the Fed (and the balance sheet of any other modern central bank) they always renew the governemtn debt, therefore the principal is never repaid, and keep buying more. In the short term they sometime sell, but in the middle and long run the central banks just keep increasing the amount of government debt they have.

 

[cubical]

But the bonds will always be renewed. If you check the balance sheet of the Fed (and the balance sheet of any other modern central bank) they always renew the governemtn debt, therefore the principal is never repaid, and keep buying more. In the short term they sometime sell, but in the middle and long run the central banks just keep increasing the amount of government debt they have.

Ah ok, so its an interest free loan that simply keeps growing and it would be temporary inflation if the fed stopped rolling over purchases of bonds? Do you have a long term graph of fed government holdings by chance?