Obvious Flaw In QE Arises: Fed Loses $200 Billion

Written by: Jack Boylan

Gee, who could have seen this coming? Ok, almost everybody, but that is besides the point. The quantitative easing (QE) program is not intended to involve any deep thinking. It just exists because the Fed says that it needs to exist and any further questioning by us peons is downright rude. Maybe we can all hope that the actual losses are as phony as the program itself. After all, if the Fed pretends to buy its own debt is it really a loss when that debt goes down in value? They didn’t have any money to buy bonds with in the first place so what difference does it make if they are losing money on the deal. Unfortunately, it doesn’t really matter to them in that they are not the ones taking the loss. The taxpayers on the other hand…well, again, you are precisely the people they don’t want asking any questions. Fortunately for those very same taxpayers, the Fed doesn’t even acknowledge that the is a loss on its portfolio so maybe no one will notice:

Granted, the Bernanke & Co. does not value its massive bond portfolio on a mark-to-market basis. But the surge in interest rates has already erased almost $200 billion in the Federal Reserve’s capital. But that’s not all.

See, that was easy! Just take your fake money, then “buy” your own bonds and then just pretend that they didn’t go down at all. Unfortunately, like ants at a picnic, some people are less than impressed with the Fed’s brilliance and always like to point out the tiniest little things and make a big deal out of them:

If interest rates continue to head higher, the value of the Fed’s liquid assets that it could sell would decline and further undermine its capital cushion. And if the velocity of rate increases intensifies, the Fed, with only $62 billion in capital, could see its entire capital base completely wiped out.

Oh, gee — there’s that nitpicking again. It certainly is troubling that the Fed has “lost” $200 billion on the bonds while its total net worth is only $62 billion. Then again, the fact they were able to “buy” $2 trillion (!) in bonds in the first place might be of interest as well. But everything hinges on the hope that nobody really notices, or more importantly cares, about any of this. One of the flaws in the Fed’s scheme was always that they were “buying” treasuries at historically low, low rates. The whole plan was to eventually raise rates. Therefore taking massive losses had to be part of the plan as well. No papering over this certainty could really plausibly disguise it. And unless it’s a suicide mission (I guess that can’t be ruled out with these knuckleheads) the Fed knows that the taxpayer will ultimately have to bail them out. But their magic trick has a more immediate concern regarding their credibility. Right now, the end game of handing the taxpayer a huge bill is nirvana compared to what they have to navigate in the meantime. Their (and our) very survival depends on people believing there is an end at all. If the world perceives this to be just one giant shell game then everything could just collapse:

This could have a serious domino effect. It could paralyze the Fed’s ability to defend the dollar’s purchasing power, causing Treasury prices to fall further and thereby push interest rates even higher.

Yes, that’s it right there. If this continues and investors come to believe that the gig is up, there is really no where to turn. Of course, there were more than a few of those aforementioned peons that pointed out this problem to begin with, but…well…shut up. But here we are and the day looks very near when we all find out if the Fed has pulled this off and there is only a humongous bill for the taxpayers to pick up. Otherwise…well maybe if we don’t think about it, it will go away. Hey, that logic seems to work at the Fed


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Obvious Flaw In QE Arises: Fed Loses $200 Billion

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