Can the Fed be insolvent?

[*T*]

...since it is a bank with assets and liabilities, and the assets are junk.

If so, is it? And what happens? Does the treasury have to just give it money?

[vinoveri]

Re: Can the Fed be insolvent?

...since it is a bank with assets and liabilities, and the assets are junk.

If so, is it? And what happens? Does the treasury have to just give it money?

It already is... except perhaps the concept of solvency doesn't really apply to the Fed.

if you've ever played the game "monopoly", you know, as is explicit in the directions, that "the bank never runs out of money".

We live in a world of monopoly money, and as long as folks are willing to accept it (or compelled as the case may be), the Fed can never be "insolvent" b/c it can create assets by printing money (the funny thing is this money is really a liability on the fed). Welcome to the surreal world of double-entry bookeeping and and a magic fairyland (actually full of trolls) where money does grow on trees (but harvesting in the money orchard is limited to a select few, e.g., bankers).

[*T*]

Re: Can the Fed be insolvent?

It already is... except perhaps the concept of solvency doesn't really apply to the Fed.

if you've ever played the game "monopoly", you know, as is explicit in the directions, that "the bank never runs out of money".

We live in a world of monopoly money, and as long as folks are willing to accept it (or compelled as the case may be), the Fed can never be "insolvent" b/c it can create assets by printing money (the funny thing is this money is really a liability on the fed). Welcome to the surreal world of double-entry bookeeping and and a magic fairyland (actually full of trolls) where money does grow on trees (but harvesting in the money orchard is limited to a select few, e.g., bankers).

Let me be more explicit:

1) So, the Fed 'prints money' (increasing its liabilites) and buys up MBS (increasing its assets).

2) The MBS defaults.

3) The Fed's assets are now less than its liabilities.

What does it do?

[vinoveri]

Re: Can the Fed be insolvent?

Let me be more explicit:

1) So, the Fed 'prints money' (increasing its liabilites) and buys up MBS (increasing its assets).

2) The MBS defaults.

3) The Fed's assets are now less than its liabilities.

What does it do?

It doesn't allow ( or doesn't recognize) the MBS default by allowing it to roll over indefinitely or simply doesn't acknowledge it. Does the public have access to the details of the fed balance sheet? I don't think so. Can it write off/roll over the bad debt and not tell anyone? Why not? It's not telling now who its lending to.

More simply, you're original point could be more likely. The debts are transferred onto the books of the U.S. (e.g., it gets an infusion from the Treasury), although this is just an accounting trick (the fed gov lending to the fed gov?)

I agree that by any normal accounting, the fed is insolvent. My point is that the CONfidence game can and will continue until the marks have had enough.

Perhaps we need to distinguish between debts and financial liabilities, terms commonly used interchangeably. What does debt of the fed mean?
I would submit that federal reserve notes, while technically liabilities, are not
actionable debt. i.e., the Fed prints $1T; what is the fed now liable for? What does that mean? Can I walk up to the steps of the fed and wave a dollar bill and demand something?

"Full faith and credit of the U.S." means (to me anyway) the U.S. will always pay its debts, and those debts will be paid in $. Since the fed can always print, it can always meet is liabilities, unless and until the currency is no longer accepted

In view of the past few months of Fed activity, anything seems possible.