The 'Insolvency' of the Fed – The New York Sun

The Federal Reserve System’s insolvency has become increasingly apparent in recent months, as the central bank’s balance sheet has ballooned to unprecedented levels. The Fed has injected trillions of dollars into the economy to help buffer the effects of the coronavirus pandemic, and many analysts have argued that the central bank’s actions have caused it to become insolvent.

The Federal Reserve’s balance sheet has grown to more than $7 trillion, an increase of $3 trillion since the start of 2020. This massive expansion of the Fed’s balance sheet has been driven largely by the purchase of Treasury bonds and mortgage-backed securities. As the Fed has acquired these assets, it has simultaneously increased the supply of money in the economy.

The question of whether or not the Federal Reserve is insolvent is a complex one. It is important to note that the Fed does not actually own the assets it has purchased. Rather, these assets are held by the Federal Reserve Banks, which are privately owned entities. Thus, the assets are not technically part of the central bank’s balance sheet.

The problem arises when one considers the liabilities of the Federal Reserve. The Fed has issued trillions of dollars in currency, and it is obligated to redeem that currency at face value. This obligation is backed by a handful of financial assets, such as Treasury bonds and mortgage-backed securities. The problem is that these assets are worth much less than their face value, and the difference between the two is referred to as the Fed’s “negative net worth.”

Critics of the Fed’s actions argue that the central bank has overextended itself and is now insolvent. These critics point to the Fed’s negative net worth as evidence of its insolvency. However, others argue that the Fed’s position is not necessarily insolvent, but rather “illiquid.” That is, the Fed may not have enough cash on hand to meet its obligations, but it does have assets that could be sold in order to generate the necessary funds.

Ultimately, the question of whether or not the Fed is insolvent is a matter of opinion. What is certain, however, is that the central bank’s balance sheet has ballooned to unprecedented levels and its liabilities now significantly exceed its assets. This has led many to question whether the Fed’s actions have pushed it into insolvency, and the answer remains unclear.