[This article appeared in the Letters section of The Wall Street Journal in a shortened form.]
Jason Furman’s “Profits and Losses Don’t Matter at the Federal Reserve,” (September 28, 2023) excuses the unprecedented and previously unimaginable losses now being suffered by the Fed. These losses, which accrue to the Treasury and ultimately to taxpayers, have surpassed $100 billion on their way, as he admits, to $200 billion or more. Prof. Furman suggests that we taxpayers shouldn’t care.
To the contrary, taxpayers should care that the Fed will spend, without authorization, $200 billion or more which will be added to their future taxes. These Fed losses are the result of a radical and exceptionally risky Fed choice to build a balance sheet resembling a giant 1980s savings and loan. In the process, it stoked bubble markets in bonds, stocks, houses and cryptocurrencies, in addition to inducing enormous interest rate risk in the banking system. Those risks have now come home to roost, producing massive Fed losses, and huge unrealized losses in banks.
The Fed’s operating losses already exceed its capital by $62 billion, which means the Fed has negative capital under normal accounting. Prof. Furman does not mention that in addition to the Fed’s huge cash operating losses, it has a mark-to-market loss of more than $1 trillion. He states that the Fed’s assets are “worth” $8 trillion, but their market value is only about $7 trillion, while the Fed has $8 trillion in outstanding liabilities.
Prof. Furman argues that the Fed’s negative capital position doesn’t matter. But if the Fed’s negative capital doesn’t matter, why cook the books to avoid reporting it? The Fed unbelievably books its cash losses as an asset (a so-called “deferred asset”) just so it can obscure its true negative capital position. The Fed changed its own previous accounting rules precisely so it could do so. We know what would happen if Citibank tried that.
Congress designed the Fed to make a profit, as did for over 100 years. Congress granted the Fed the very valuable monopoly to issue paper dollars and the Congress has repeatedly protected the Fed from losses by instructing the Treasury to bear the first loss tranche in emergency lending programs.
With short term rates above 5%, the Fed’s money-printing monopoly would produce more than $100 billion in profit per year. The Fed has lost that profit plus lost another $100 billion by taking on an interest rate risk bet that would embarrass any prudent banker.
Who authorized the Fed to take an enormous interest rate bet risking taxpayer money? Nobody but the Fed itself. Does “independence” give the Fed the right to spend hundreds of billions of taxpayer dollars without Congressional approval? We think that question needs to be debated.
