Letter: The Fed’s accounting ploy has echoes of S&L crisis

Published in the Financial Times:

Your article “Central banks: Rising losses risk bailouts and political pressure” (Report, December 12) points out that central banks, having bought a lot of low-yielding bonds together, are now losing a lot of money together. Do these losses matter? You quote a Danske Bank strategist saying “central banks do not aim to make profits” — a comment offered as a rationalisation. But this is contradicted by the fact that central banks are all structured precisely to make money by seigniorage from their currency monopolies. As for the Federal Reserve, whose losses are rapidly mounting, its so-called “deferred asset” accounting is not a solution, but simply a phoney accounting used to keep the losses from reducing the Fed’s publicly reported net worth, or rendering it negative. This is the same accounting ploy used by insolvent savings and loans in the 1980s during the collapse of their industry. This has some poetic justice since the Fed, with its $2.7tn of fixed rate mortgage assets, has inside it the financial equivalent of the largest savings and loan in the world by far. Alex J Pollock Lake Forest, IL, US