- Like a private bank, the Fed maintains some level of capital as a buffer against losses.
- When those losses exceed the value of its capital, the Fed becomes insolvent, meaning the liabilities it owes to others are greater than the total value of the assets it holds.
In the post-pandemic period, the Fed expanded the money supply significantly to support a swift economic recovery.
- It did so by purchasing vast amounts of US Treasury bonds and mortgage-backed securities.
- While those assets seemed like good investments at first, they are now a major hole in the Fed’s financial position.
Bottom line: The Fed is bankrupt.
- The most recent data show that the Fed owes the Treasury over $41 billion, which exceeds its total capital.
- By common standards, The Federal Reserve is insolvent.