Keeping the Fed solvent, with accounting trickery! Read these two grafs from Reuters while picturing smoke coming out of Ron Paul’s ears:
“Could the Fed go broke? The answer to this question was ‘Yes,’ but is now ‘No,’” said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. “An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital.”
The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.
Did you get that? Instead of taking a losses, the Fed can magically offload the to the Treasury, which is chock full of gold doubloons and fancy chalices and giant piles of silver trinkets and rubies the size of John Madden’s neck. So, hey, no problem.
But wait — there’s less! Skip two grafs down:
“Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible,” said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
“Technically impossible.” The Fed can never go broke, because… because… because it says so.
We used to send people to jail for this kind of fraud.