The Federal Reserve is Bankrupt!

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investorzzo's picture
Status: Diamond Member (Offline)
Joined: Nov 7 2008
Posts: 1182
The Federal Reserve is Bankrupt!

How long can someone who has stepped on a landmine, remain standing
– hours, days? Eventually, when he is exhausted and his legs give way,
the mine will just explode!

DrKrbyLuv's picture
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: The Federal Reserve is Bankrupt!

The Fed, like most of our big banks, may be insolvent but I don't see them going bankrupt.  We had an opportunity to break them during the first "bail-out."  You may remember that originally, Congress voted against the bill but was over-ridden by a Senate effort and scare tactics from Treasury Paulson (Martial law).

They were very vulnerable then and would have gone belly up without the bail-out.  I think this is why they pushed so hard to get that deal done.  Since that legislation, the Fed has been given extreme and unusual powers - they can print as much money as they want basically; so how do they now go bankrupt?


machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: The Federal Reserve is Bankrupt!

In all probability, the Federal Reserve now has a negative net
worth. Yet it seems impossible for a run on the central bank to
develop, for at least three reasons.

One is that the Fed's major
liability is currency. But currency cannot be redeemed for the assets
which 'back' it -- Treasurys, agencies, and increasingly, worthless
junk paper. A dollar bill can only be exchanged for a fresher,
newly-printed dollar bill. So in principle, the Fed's main liability is
perpetual and unredeemable.

The Fed's second most important
liability is to member banks, for the reserves it holds. Of what use
would it be to a member bank to attempt to flee an insolvent Fed? The Fed has an effective monopoly on interbank clearing, so running from the Fed would mean going out of business.

final factor preventing a run is that given its ability to create reserves out of thin
air by purchasing assets, the Fed need never fail to make a payment,
thus exposing itself to creditor-initiated bankruptcy. The Fed's
overdrawn checks are defined by law as legal tender.

Where, then, are the insolvency sanctions on this recklessly mismanaged institution?
Apparently, they are quite indirect. One might consist of an attack on
the external value of its currency liabilities. Legal fiat forces the
dollar to be accepted as legal tender domestically, but foreigners
aren't constrained to accept them.

A second sanction might be popular
revolt against the legal tender regime itself. After all, the U.S.
fedgov is massively insolvent, to a far greater degree than the Fed.
Only cash flow collected at gunpoint keeps it going hand-to-mouth.
Obviously, this is an extremely insecure arrangement from the
standpoint of long-term viability. To my knowledge, no long-term plan
exists to ever make it viable.

joe2baba's picture
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
Re: The Federal Reserve is Bankrupt!


bankruptcy is a legal procedure. insolvent is a state of insolvency ie unable to pay off debts.

the fed has the ability to print as much money as it wishes. therefore it will be able to payoff it's debt.

i believe in the crash course there are two options default or inflate. the current course is to inflate.

we have been warned by china that a default is out of the question. expect to see helicopters  overhead for the foreseeable future.

in my crystal ball i see a one world currency for the long term. the process is probably underway right now. the process will in all likelihood resemble what the eu went thru in converting national currency to the euro.

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