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John Tammy Opinion: Don’t Be Ridiculous, the Fed Is Not Going Bankrupt

It will never happen, but it would certainly elevate commentary about the Federal Reserve to a reasonably sane level if its myriad critics and supporters would stop and imagine what economic life would be like if the central bank didn’t exist. Without it, life would be the same as with it.

If you doubt this, ask yourself if absent the Fed whether or not government would continue trying (in vain) to manipulate the cost of credit. Hopefully the answer to the previous question is pretty obvious, after which we can rest assured that with or without the Fed there would still be regulation of banks, bank bailouts, troglodytic, Soviet-style efforts to increase and decrease so-called “money supply,” and everything else presently outsourced to the Federal Reserve by Congress and Treasury. In short, nothing would change if the Fed didn’t exist. What the Fed does now would be handled by other bureaucracies in search of a purpose if the Fed shut its doors.

It’s worth thinking about as various pundits bruit the laughable notion that the Federal Reserve is presently bankrupt, or headed toward bankruptcy. Such a view is much less than serious.

To see why, it’s important to cease the pretense that the Fed is some powerful “other” in government. No, the Fed is once again an outsourced creation of Congress and Treasury. And since it is, it doesn’t much matter if some or a lot of the assets on its books are presently down in value. That is so because the Fed is part of a federal government that has arrogated to itself a substantial portion of the wealth and earnings of the most productive people on earth.

All this talk about a “bankrupt” Fed brings to mind the countless books and opinion pieces over the decades claiming that the United States is “bankrupt.” Oh yes, the country that can borrow at the lowest rates of interest in the world is “bankrupt.” Except that it isn’t. And the surest sign that the U.S. isn’t bankrupt is its tens of trillions of debt; debt that continues to grow in gargantuan amounts.

About the debt, it should be made clear that this isn’t an effort to excuse it. Government spending is a horrid tax on progress. At the same time, it is a rejection of commentary that vandalizes reason about the Fed, Treasury, or the U.S. being “bankrupt.” Sorry, but bankrupt entities can’t run up debt like this nor can they buy up debt. Precisely because Americans are heavily overtaxed now, and precisely because the overtaxation of the world’s most productive people is expected to continue well into the future, the federal government can borrow with ease. Much the same, federal entities like the Fed can be “underwater” in terms of certain holdings without remotely flirting with bankruptcy.

Speaking of assets on the Fed’s books that are presently down in value, it’s important to point out why the Fed has been able to build up so much U.S. debt in the first place. Some who should know better claim that in amassing a large balance sheet that the Fed has been acting as financier for the federal government. Supposedly it’s been “monetizing” federal debt. This might be even dumber than the assertion about the Fed’s bankruptcy. And it’s backwards.

The Fed is able to buy lots of Treasury debt precisely because demand for what is owed by Treasury is rather global. In other words, the Fed isn’t monetizing Treasury as much as the whole world wants to own the income streams of an entity that owns substantial amounts of the earnings of the world’s most productive people. Since the world knows Treasury won’t go bankrupt, it’s safe for the Fed to use funds on deposit with it to buy the world’s safest debt.

About all that’s been written, none of it should be construed as a defense of the Federal Reserve. As a governmental entity, it’s worse than unnecessary. At the same time, obsession with the central bank has blinded those obsessed as the commentary about a “bankrupt” Fed attests. Ignore the crazies. So long as Americans are productive and (sadly) overtaxed, the Fed will not be bankrupt. Don’t waste your time on what’s absurd.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book is The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution. This article was originally published by RealClearMarkets and made available via RealClearWire.

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