Friday, June 24, 2011

Don't Trust Bernanke? You're On Solid Ground

There's a large dose of inside-baseball stuff here, but it's readable.


John Hussman points out the Fed’s leverage ratio in now higher than that of Bear Sterns and Fannie Mae with similar interest risk though less credit risk.

...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…(See below)

To avoid the potentially untidy embarrassment of being insolvent on paper, the Fed quietly made an accounting change several weeks ago that will allow any losses to be reported as a new line item – a “negative liability” to the Treasury – rather than being deducted from its capital. Now, technically, a negative liability to the Treasury would mean that the Treasury owes the Fed money, which would be, well, a fraudulent claim, and certainly not a budget item approved by Congress, but we’ve established in recent quarters that nobody cares about misleading balance sheets, Constitutional prerogative, or the rule of law as long as speculators can get a rally going...

A "basis point" is 1/100th of a percent.

So if long-term rates go from (say) 2.00% to 2.35%, Fed capital becomes zero.

Or--the preferred alternative--Fed simply creates a S*&^load of "money" by fiat; Fed capital is intact, but your hamburger costs $65.50 at McDonald's.

Nice, Ben. Really nice.

HT: BigPicture


J. Strupp said...

This seems incorrect. I'll have to do some searching on this one.

J. Strupp said...

Regarding that 35 basis points part:

35 basis points just doesn't seem correct at all. Especially since most of the Feds. asset purchases are simply swapping one government asset for another.