From Ed Dolan's Econ Blog: at EconoMonitor:
Each time the Fed undertakes a new program of quantitative easing, questions arise about the possible impact on its solvency. I addressed that concern in November 2010, at the time QE2 was announced. Here is an updated version of that post that looks at the solvency issue in the context of QE3.
The Fed’s new program of quantitative easing, QE3, once again raises an old question: Can central banks go broke? Conventional analysis, aptly summarized by Willem Buiter in a 2008 report, says “Never–Well, hardly ever.” The Fed is most assuredly not going to suffer a run or become unable to meet its obligations, but under some scenarios, keeping it from going going broke could raise difficult political issues and perhaps even threaten its independence.
We can start by noting that the Fed, like most central central banks, is rather thinly capitalized. As of September 2012, it had capital of some $55 billion, about 1.9 percent of its assets of $2,825 billion. By comparison, the consolidated balance sheet for all commercial banks showed assets that exceeded liabilities by 11.5 percent. If the Fed were a commercial bank, it would not be insolvent, but it would be on the watch list.
Of course, the Fed is not a commercial bank. The unique nature of its assets and liabilities allows it to operate safely with just a sliver of capital. Normally, the Fed’s assets have consisted largely of short-term Treasury securities, which are as close to risk-free as you can get. As for liabilities, as recently as the end of 2007, 90% of them consisted of Federal Reserve currency. Currency is a truly marvelous kind of liability, , since it is neither interest-bearing nor redeemable. Together, those assets and liabilities generate a healthy net interest income, most of which it turns back to the Treasury. With a balance sheet like that, who needs capital?...MUCH MORE including:
...Let me emphasize this: The Fed is NOT a private corporation in any ordinary sense of the word. If the Treasury were to gift the Fed with a $100 billion capital grant, that would NOT amount to putting it in the pockets of the Rothschilds, whatever you might read to the contrary on the internet. But who could guarantee that all those paranoid myths about the Fed would not be raised in Congressional debate or on talk radio?...
