Letter: Questions need to be asked about the Federal Reserve’s losses

Published in the Financial Times.

Brian James Gross’s loyal defence of the Federal Reserve’s losses (“Why commercial banking logic won’t apply to the Fed”, Letters, May 31) doesn’t ever mention the egregious amount of these losses — $231bn at the end of May and still growing — but it does get one thing right: that the Fed is not “a” bank. No, the Fed combines 12 government-sponsored banks, each of which has loans, investments, deposits, profits or losses, and stockholders that are private banks.

The stockholders have contributed a combined $39bn in paid-in capital, on which they expect and so far do receive dividends; they might be surprised to find out that their capital is “irrelevant”. In nine of the 12 Federal Reserve banks, the losses exceed the total capital.

These losses are not mere “accounting losses”, but cash operating losses. The losses are an expense to the consolidated government and to the taxpayers, and increase the national debt. In addition, the 12 banks have about $1tn in mark-to-market losses on their investments, suggesting more operating losses in the future.

The Federal Reserve is a profit-seeking entity, though not a profit maximiser, intentionally designed to make money for the government by issuing non-interest bearing currency and investing in interest-bearing assets. That the combined Federal Reserve banks instead are now losing so much money is because they took enormous interest rate risk, lending long and borrowing short, and are upside down on the trade.

The Fed, with its component banks, is not “sovereign”, nor does it have “autonomy”, as Gross suggests (although it wishes it did!), but is entirely accountable to and subject to the elected representatives of the people in Congress assembled. Congress should surely, just as Brendan Greeley said in the original FT opinion piece, be making judgments about the Fed’s losses — how they are deficit-increasing and national debt-increasing, whether Federal Reserve banks should continue to pay dividends when they have no profits, and whether something needs to be done about the Fed’s capital, which on a combined basis is in reality negative $185bn.

Alex J Pollock

Senior Fellow, Mises Institute,

Lake Forest, IL, US