As Fed’s Assets Move Above $2 Trillion, Question Arises Of What It Is Really Worth

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The Federal Reserve now has an asset base of more than $2 trillion.

According to The Wall Street Journal, "Once recently announced programs to help consumer credit and mortgage markets are up and running, that figure should climb toward $3 trillion. The balance sheet was under $1 trillion as recently as mid-September."

But, is that real money, or Confederate dollars?

Much of what the Fed has put into its vault is paper it has taken from banks in exchange for cash. Some of those assets are probably bonds based on derivatives, consumer credit pools. and perhaps even LBO loans. The Fed is also aggressively lending money through its discount window. Average daily borrowing at that facility has been running at about $240 billion. All that money may be paid back, but in the current environment, that is not a lock.

The Fed has been reluctant to disclose which financial firms are making use of its facilities. It does not want to frighten bank customers and shareholders by revealing that one or two banks are being more aggressive than others in terms of getting funds. That argument has its strengths, but it is taxpayer money. Maybe the public should have a right to know where it goes and what risks the lending carries.

There may be another reason the Fed is silent about what happens inside its vaults. In a world where "mark to market" accounting still rules, the assessment of balance sheets, the value of what the Fed holds might not be set at one hundred cents on a dollar. There not many CPAs checking out how the Fed has set up its books.

The value of the Fed’s holdings may be much lower than reported.

Douglas A. McIntyre