Home / Banking / Bailout FOR the FED, Not from It
Print Friendly and PDF

Bailout FOR the FED, Not from It

Written by Gary North on November 28, 2011

Remember this question: “Who guards the guardians?” I offer another: “Who lends to lender of last resort?”

This is not hypothetical. The Federal Reserve is called the lender of last resort. In theory, it can always escape  an audit. It cannot be shut down. But this applies legally only to the Board of Governors, an agency of the U.S. government. Legally, however, the FED’s assets — including the gold — are on the books of the Federal Reserve Bank of New York, a private agency.

There are general accepted standards for accounting. If the New York FED suffers losses, it must cover them.

The FED is up to its eyeballs in long-term bonds: Treasury bonds (“operation twist”) and Fannie Mae and Freddie Mac bonds. Problem: if long-term interest rates rise, the market value of these bonds falls. Price inflation — caused by the FED (monetary base) and commercial banks (loans) — raises long-term rates.

The FED keeps these bonds on its books at face value. So, it will not suffer losses on paper. But there is a problem. If it sells these assets, it must take the loss. It must write down the asset. This is deflationary.

Why would it ecer sell? Because that is the only way it can exit from its huge build-up of debt, 2008 and 2011 (QE2). Bernanke keeps assuring Congress that it has a plan for exiting. But there is only one way: to sell assets. If it does, it must take the hit to its balance sheet. It can’t sell the bonds for what it paid. It will suffer losses — gigantic losses.

Who will pay for these losses? The U.S. government.

The FED pays back most of the interest income it receives from the government’s bonds.  This amounts to $80 billion a year. But, earlier this year, the FED and the Treasury cut a deal. If the FED suffers losses, it will keep the money and write IOUs to the Treasury for the money it does not pay back.

But the Treasury can’t spend IOUs. It is running a $1.3 trillion annual deficit. So, where will it get the money? There are only three sources: from the FED (monetary inflation — no exit strategy), from taxpayers (no chance), and from lenders (more deficit).

There is no exit strategy. The FED will not reduce its balance sheet. It will sit there, like yeast, waiting for commercial banks to lend, thereby translating the existing hyperinflation in the monetary base into hyperinflation in prices. But will it dare to do that? If not, it must sell assets. Wham! There’s the crisis. The bonds will be sold at a loss.

Here’s how it works:

Now as losses on future bond sales arise, the Fed does not reduce capital, as would normally occur, instead they increase the amount of the IOU to the Treasury. In effect, the Fed is issuing private IOUs to the Treasury and using the cash to avoid appearing insolvent. As long as the Fed can keep issuing these IOUs, its capital will not be wiped out by losses on its bonds. Corporate executives who played these kinds of accounting games would be sent to jail. Americans might be outraged to know that the Treasury is a public institution while the Fed is privately owned by banks, so this accounting sham is another example of bilking the taxpayers to enrich the banks.

The United States now has a system in which the Treasury runs huge deficits and sells bonds to keep from going broke. The Fed prints money to buy those bonds and loses money owning them. Then the Treasury takes IOUs back from the Fed to keep the Fed from going broke. This arrangement resembles two drunks leaning on each other so neither one falls down. Today, with its 50-to-1 leverage and investment in volatile securities, the Fed looks more like a poorly run hedge fund than a central bank.

For a detailed study of the FED’s new program of transferring its future losses to the Treasury, click the link.

Continue Reading on kingworldnews.com

Print Friendly and PDF

Posting Policy:
We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse. Read more.

7 thoughts on “Bailout FOR the FED, Not from It

  1. This is PRECISELY the reason the ILLEGAL institution, The federal reserve needs to be abolished and the control of our money returned to the people. Congress violated the constitution we they abdicated

    their authority to a PRIVATE organization. The FED has screwed the American public out of TRILLIONS of dollars ( TAX DOLLARS ) every year for nearly 100 years. And now the game they are playing is beginning to implode. The simple fact of the European money SCAM,

    the euro is falling apart should be evidence enough the FED is OUT of control. THE only reason congress will NOT stop the FED is THEY are making to much money, being part of the SCAM. OWS is one of the FINAL steps in the plan to destabilize the American economy, creating a crisis they can manipulate to gain more control. EVERY member of congress is guilty of violating their oath of office

    (they have to swear to uphold and PROTECT the constitution). Witch it seems to me they are doing EVERYTHING in their power to destroy.

    The only time the constitution is ALLOWED to be the supreme law of the land is when it benefits them and they can USE it to forward their goals of complete power.

  2. How long can any person, agency, or government exist economically, when it has to borrow money to just pay the interst on it's debt, then adding to that debt substantially more than the borrowed interest payements, each and every year, before it can no longer borrow enough money to just pay the interst payments, especially when the intest rates will be going up, just as the debt is by spending more than they take in? It doesn't take a rocket scientist to figure out that this can't go on for very long, we have 5 to 10 years at the most, before this downward spiral collapses the country financially. Raising taxes is a tool used by the government to slow down an economy that has heated up and is booming, to stop inflation that a heated up or booming economy causes, and the only time tax increases can sustain tax revenue is if the economy is booming, otherwise those same increases slow down or stop an economy, and our economy of today cannot afford that, so to stop this downward economic spiral, the only thing that can be done safely is to cut spending, and in our circumstances, do it quickly and deeply to avoid an economic crisis or disaster.

  3. Mike Young says:

    No you are not entirely correct in your assumption that every member of Congress is guilty of violating their Oath of Office. Congressman Ron Paul has been attempting to get the Un Constitutional Federal Reserve abolished for many years but unfortunately he is only one Patriot against all other Congresspeople and he is usually out voted by the rest of the unknowledgable and uninformed members of Congress.

  4. What people should fear, among many things Obama and the Democrats have done to weaken the USA, is the fact that at sometime soon interest rates will return to their historical levels and stay there. When that happens, people will start seeing the effect from Obama’s and the Democrats’ out-of-control spending, that has created these record deficits of 1.5 trillion dollars each and every year of Obama’s administration. Then the downward spiral of uncontrollable bankruptcy will appear because of the governments failure to be able to meet the interest payments on the huge national debt of Obama’s and the Democrats’ yearly deficits have produced, with the higher and historically normal, interest rates. Before Obama’s deficits, with these unusually low interest rates created by Obama and Bernanke, the interest payments were 200 billion dollars a year, but because Obama and the Democrats have doubled the national debt in just 6 years, since the Democrats won majority control of both houses of Congress and the US budgets in Bush’s 2006 midterm election, when the interest rates go back up to their normal level, which they will have to eventually to get the economy going again, the interst payments will be close to a trillion dollars a year, something the USA will not be able to afford to pay with everything else it has to pay by just at this time borrowing 42 cents of each dollar it spends, including those 2oo billion dollar interest payements. We are, and have been, paying interest payments with 42% of more borrowed money, for which we will have to pay even more interest in the future, a downward economical spiral, until the country collapses economically.

  5. Not Impressed says:

    This is like a Ponzi scheme that is about to come unravelled. Do you know that one of Ponzi's many schemes closed down SIX banks at ONE TIME? This was reported in a recent issue of AARP bulletin in an article that was making the claim Social Security is NOT a Ponzi scheme. Anyway, in a collapse such as this, those who get OUT first lose less than those that get out later and the rate of collapse increases as time progresses. Go and figure this out for yourself, because it takes too long to explain. It took a long time for the Titanic to sink but the rate got faster and faster. The numbers are there and the trend is more or less obvious. More and more people are realizing what is taking place and the readers of the AARP bulletin will end up both taking this bubble DOWN but also suffering because of it.

  6. One of the best explanation I've seen yet on the choices being forced onto the public! But the public voted for these looters again, & again!

  7. Wonderful paintings! That is the type of information that should be shared across the net. Disgrace on the search engines for no longer positioning this publish upper! Come on over and talk over with my site . Thank you =)