Even the Federal Reserve is Broke

By Andrew McCleese

April 22, 2011

How bad is the situation in America today? 


Very bad.  Not like Animal House bad and the dean has kicked the frat boys off campus, more like Titanic and the boat hit the iceberg and everybody dies except the elite in their comfy lifeboats.

Whether we are talking about the continual erosion of personal freedom in too many ways to name, or radiation, toxic dispersants, droughts, crop failures, wild fires, wars, rumors of wars, oil prices, food prices, maybe nothing is as telling about the dire straits the nation is currently in than the following quote from John Hussman:

As a side note, it’s probably worth noting that the Federal Reserve has already pushed its balance sheet to a point where it is leveraged 50-to-1 against its capital ($2.65 trillion / $52.6 billion in capital as reported the Fed’s consolidated balance sheet ). This is a greater leverage ratio than Bear Stearns or Fannie Mae, with similar interest rate risk but less default risk. The Fed holds roughly $1.3 trillion in Treasury debt, $937 billion in mortgage securities by Fannie and Freddie, $132 billion of direct obligations of Fannie, Freddie and the FHLB, and nearly $80 billion in TIPS and T-bills. The maturity distribution of these assets works out to an average duration of about 6 years, which implies that the Fed would lose roughly 6% in value for every 100 basis points higher in long-term interest rates. Given that the Fed only holds 2% in capital against these assets, a 35-basis point increase in long-term yields would effectively wipe out the Fed’s capital.

Still, the Fed also earns an interest spread between its assets and its liabilities, providing about 3% annually (as a percentage of assets) in excess interest to eat through, which would allow a further 50 basis point rise in interest rates over a 12-month period without wiping out that additional cushion. In that case, the interest paid on the Federal debt held by the Fed would be used to cover the Fed’s losses, rather than being remitted back to the Treasury. In any event, it is clear that if the Federal Reserve was an ordinary bank, regulators would quickly shut it down.

However, can we really believe the Federal Reserve’s balance sheet is only $2.65 trillion when they have never been audited?  When you actually consider the liabilities being guaranteed by the Federal Reserve actually total somewhere in the neighborhood of $24 trillion, is the self-reporting of a Fed balance unequivocal truth, or are we looking at more of the “smartest guys in the room”  and their Enron accounting?  Nobody can be sure, and that is inherently why we have a financial crisis in the first place, lack of accurate price information set by market forces.  The fact that there is so much debt, so many exotic CDOs of questionable value, even after ending mark-to-market, the problem is truly one of the Feds price distorting powers on literally everything you own and consume.

Yes John, regulators would shut down the bank and if the American people actually understood the monetary system or were shown an independent audit, they would demand the bank be shut down.

Well, maybe I am being too optimistic.  It was recently uncovered that yes indeed, as long suspected, the American taxpayer footed the bill for Fed bailouts around the globe, yet there were no protests in the streets demanding arrests or people to step down for weeks and weeks like we have seen in the Arab world.  There were no politicians (except maybe Ron Paul and Bernie Sanders constant drum beat) calling for a closing of the Fed and the returning of their “assets” to the People where they belong.  No, Americans did nothing, and Americans largely do nothing in the face of criminal actions by their ruling oligarchs.  The power has been effectively removed from the people through a continual parade of fear, intimidation, misinformation and downright propaganda, sorry, now called “public relations.”

Many people do not realize that the Fed recently granted itself more discretionary, emergency powers so to speak by amending its 35% pressure holding limit.  In English this means the Fed will allow itself to participate in Treasury auctions at a rate more than 35%.  Additionally, the Federal Reserve has found a loophole to transfer all of its losses to the U.S. Treasury. i.e. you (that is if you are in the 50% of the country that actually pays an income tax).  Beyond the sheer immorality of this clandestine theft (need I say yet again), this is extremely dangerous.  The tenuous confidence holding together this whole phony monetary and fiscal system disintegrates a little more each day with each sign of price inflation and general instability and uncertainty.

The Fed and the Treasury are most certainly in a negative feedback loop inside of a liquidity trap with absolutely no way out.   For every bond bought is a further signal of the undesirability of U.S. debt.  With every debt auction grows the necessity of rapid interest rate increases as inflation can no longer be hidden in smaller packages.  With rate increases comes higher debt servicing on a debt that we already have to issue debt to service in the first place.  This is what Tim Geithner meant when he said it would be catastrophic not to increase the debt limit.  Of course when interest rates rise, there goes the pretense of recovery (sic).

It has become chaos theory with no way to predict all the possible unintended consequences.   One thing is certain however, at some point even societies and governments that make good decisions decline and fade.  Societies and governments that behave as America has, well they implode and destroy themselves or try and destroy other nations as a way out.  Potentially the only thing that makes America “exceptional” (but not to the point of avoiding calamity) is we have nuclear weapons and spend 42.8% of global defense spending.  Something tells me we are either going to go to war (again) or the world will end the Federal Reserve Note as the reserve currency and “bail out” the American society for pennies on the dollar with the Bancor or some other globalist pipe dream.

I wear many hats but history, economics and political observance have always been a passion. I am a graduate of the University of Cincinnati College of Business with a degree in Information Systems and Digital Business with a minor in European History. I work for a small mom-and-pop IT consulting and software design company. We deal in servicing mostly government funded non-profit mental and behavioral health care agencies in the state of Ohio. In this I deal with Medicaid and Medicare funds and have a little insight on the boondoggles of government there. Thankfully the undemanding nature of my daily profession gives me ample time to read and stay aware of our current state of affairs which I find stranger than fiction in many instances. In addition to being in the IT field, I have also been self employed with a small contracting company so I might know a thing or two about the plight of small business that employs 71% of the American workforce. I however don't draw my knowledge from my day jobs, which I have had a few; I draw it from an intense obsession with facts and observation about the world in which I live. I do have formal education in things such as history, economics and finance particularly as it pertains to global issues, but I have come to find much of what I thought I knew from the formalities of a state university I had to unlearn through much time and independent research. I hope you enjoy what I bring you which is not often heard in the mainstream news outlets. I would like to think my own personal editorializing is not only edifying but thought provoking while not at all obnoxious. That last one may be a hard to achieve.


  1. Andrew McCleese

    April 26, 2011 at 8:28 am

    Metaphor – if they were a commercial bank.

    USD, being debt money, puts us in oxymoron land…

  2. Jay

    April 26, 2011 at 1:46 pm

    The Fed never had any money to begin with. All it has is a computer that changes the digits electronically in the computers of the borrowing banks that it supposedly lends money to each evening. There is not enough paper and ink to even print fiat dollars to represent these electronic digits that people treat as valuable money. If the electricity goes off, and the computers shut down then suddenly money no longer exists. But as long as people believe that these electronic dollars and paper greenbacks are worth something, they will continue to trade them. It really is that simple.

Leave a Reply

Your email address will not be published.