The ‘Insolvency’ of the Fed

Published in the New York Sun:

“A bad balance sheet killed Silicon Valley Bank,” Mr. Coy writes. “You know what other bank has a similar balance sheet?” he asks. “The Federal Reserve,” is the reply. An ex-Treasury official, Alex Pollock, goes further, telling us the Fed’s balance sheet “looks just like a Savings & Loan in 1980.” It echoes the worst banking crisis since the Depression. It’s a reminder that while we may be in a banking crisis, the real emergency is fiat money.

It was abandoning the gold standard, after all, that allowed central banks like the Fed to veer into monetary experiments like its Quantitative Easing, buying up trillions in assets while keeping interest rates artificially low. Now that rates are rising, a reckoning is at hand. The Fed’s QE assets “yield 2 percent or 3 percent, but the cost of funding them is now over 4 ½ percent,” Mr. Pollock notes — “a guaranteed way to lose money.” 

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Mr. Pollock, who directed financial research at Treasury, sums up the Fed’s view as “It doesn’t matter and no one cares.” There may be some truth to this, given the deference the press shows the Fed and the Fed’s own obfuscation of its work via the PhD-inflected language known as FedSpeak. Yet the bank runs could raise scrutiny on the Fed. Asked how Silicon Valley Bank’s balance sheet compares to the Fed’s, Mr. Pollock says “it’s worse.”