Wednesday, December 12, 2018

Zero Hedge — Fed Net Worth Turns Negative Following Record $66BN In Paper Losses Tyler Durden

What immediately caught the attention of financial analysts is that the gaping Q3 loss of over $66 billion, dwarfed the Fed's $39.1 billion in capital, leaving the US central bank with a negative net worth, which would suggest insolvency for any ordinary company, but since the Fed gets to print its own money, it is of course anything but an ordinary company as Bloomberg quips.
Commenting on the Fed's paper losses, former Fed Governor Kevin Warsh told Bloomberg that "a central bank with a negative net worth matters not in theory. But in practice, it runs the risk of chipping away at Fed credibility, its most powerful asset.’’
...a negative net worth is sure to raise eyebrows especially after Janet Yellen said in December 2015 that "capital is something that I believe enhances the credibility and confidence in the central bank."…
This is also a reason central banks still hold gold, which Keynes called "the barbarous relic." Makes no sense in a modern monetary system for currency sovereigns, but whatever — perception is reality.
While a central bank can operate with negative net worth, such a condition could have political consequences, Tobias Adrian, financial markets chief at the IMF said. “An institution with negative equity is not confidence-instilling,’’ he told a Washington conference on Nov. 15. "The perception might be quite destabilizing at some point."

2 comments:

Andrew Anderson said...

In any case, the Fed will certainly never return to its far leaner balance sheet from before the crisis, which means that it will continue to indefinitely pay banks interest on the excess reserves they park at the Fed, with many of the recipient banks foreign entities.

Barr, a Kentucky Republican, has accurately criticized that as a subsidy for the banks, one which will amount to tens of billions in annual "earnings" from the Fed the higher the IOER rate goes up.
Zero Hedge

Since only banks in the private sector may use fiat, except for mere coins and bills, the so-called "natural" interest rate in fiat is ZERO percent - as if there's anything natural about not allowing citizens to use their Nation's fiat.

Anyway, one way the Fed compensates for this result of privilege for the banks is to pay them interest on their excess reserves (IOR) - which is clearly a bank subsidy since account balances at the Central Bank are inherently risk-free.

Andrew Anderson said...

The Fed is far less cautious with the treatment of its "profits", which it regularly hands over to the Treasury: the interest income on its bonds was $80.2 billion in 2017. The central bank turns a profit on its portfolio because it doesn’t pay interest on one of its biggest liabilities - $1.7 trillion in currency outstanding. Zero Hedge [bold added]

Since accounts at the Central Bank are inherently risk-free, the MOST they should return is ZERO percent minus overhead costs.

That said, individual citizens have an inherent right to use their Nation's fiat FOR FREE up to a reasonable account limit such as $250,000 and should be allowed such accounts at their Central Bank or Treasury.