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Fears Grow That Fed Might Be Going Bankrupt, Might Need Bailout

Tuesday, October 29, 2013 - 1:49 PM
Fears are growing that the Fed's continued bond buying is putting it in a situation where it will go bankrupt and need a bailout. 

As stimulus tab rises for Fed, worries grow it may require a bailout - latimes.com

The issue has not generally beeen raised when talking about interest rates, but the longer the Fed continues to buy bonds to keep rates low, the closer it gets to bankruptcy.

You see, the Fed is buying bonds at low rates. When rates rise, those bonds will be worth less. Every time interest rates rise, all existing bonds go down in value. The Fed has been on such a large buying spree and for so long, that when interest rates do go up, it could make their holdings worth enough less to bankrupt the Fed. It could only see them at a loss.

The Fed already has bought $3.8 trillion in bonds that it continues to hold. They will be worth a lot less as interest rates rise, making for a huge loss to the Fed.

I would think the flip side is that that makes for a conflict for the Fed in deciding about raising interest rates, as they will have to consider their own solvency as well as the benefits to the general economy. Of course, this also makes it all the more urgent for the Fed stop buying more bonds -- and makes what they already have done that much more questionable a tactic to use for so long and so much.
10
me1004me1004370 posts since
Jan 16, 2010
Rep Points: 2,572
1. Tuesday, October 29, 2013 - 2:01 PM
Say it ain't so! Good timing of Bernanke to "get out of Dodge" at the end of this year if some catastrophic rise in interest rates occurs in the future. Yellen may be walking into a worst case scenario trap. Of course the odds of this even coming close to occurring is very remote, but it is possible.
7
ShorebreakShorebreak2,615 posts since
Apr 6, 2010
Rep Points: 14,182
2. Tuesday, October 29, 2013 - 2:04 PM
Just curious.  Who bails out the Fed??  We taxpayers are already overburdened with all the debts of our nation so do they just print more play money to bail out the Fed?  Just curious.
4
paoli2paoli21,372 posts since
Aug 10, 2011
Rep Points: 6,011
3. Tuesday, October 29, 2013 - 2:27 PM
I could use a bailout as a result of all the money they need to cover their bailouts.
5
MaeclMaecl81 posts since
Jul 6, 2010
Rep Points: 652
4. Tuesday, October 29, 2013 - 5:18 PM
If the Federal Reserve goes "bankrupt" what will be the effect on all the financial institutions? Perhaps there is something to having a small percentage of gold coins in one's portfolio. Considering the chaos that would ensue probably there would be nothing open to spend them at anyway. The mere suggestion that this situation could arise seems out of this world. "Beam me up Scotty" if it does occur.
3
ShorebreakShorebreak2,615 posts since
Apr 6, 2010
Rep Points: 14,182
5. Tuesday, October 29, 2013 - 6:34 PM
I second that.  "Beam him WAY up Scotty!"  :)  Creeps!  I'm just joking!  It's too late to end the day being in a bad mood.
3
paoli2paoli21,372 posts since
Aug 10, 2011
Rep Points: 6,011
6. Wednesday, October 30, 2013 - 3:19 AM
Couldn't they just keep printing money to fund any losses they incur. They have been playing with Monopoly money to date, why change now. The real question is what do they do when the dollar becomes worthless. That's when the you know what hits the fan.
3
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
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