From: lessgovt@gmail.com   
      
   For the First Time, the Fed Is Losing Money   
   By Paul H. Kupiec and Alex J. Pollock, March 26, 2023, WSJ   
      
   Like all central banks, the Federal Reserve was designed to make money for the   
   government from its monopoly on issuing currency. The Fed did generate   
   profits, which it sent to the Treasury, every year from 1916 on—until last   
   fall. In a development    
   previously unheard of, the Federal Reserve has suffered operating losses of   
   about $42 billion since September 2022.   
      
   That month, the massive interest-rate risk created by the Fed’s   
   asset-liability maturity mismatch began generating cash-operating losses, and   
   the losses now average $7 billion a month. This is because the Fed’s   
   trillions of dollars of long-term    
   investments yield 2% but cost 4.6% to finance. The Fed will soon have negative   
   equity capital, and as operating losses continue to mount, its equity-capital   
   deficit will grow.   
      
   In a July 15, 2022, note, the Fed’s Board of Governors discussed the   
   possibility that the system could incur substantial operating losses as it   
   increased interest rates to fight inflation. The Fed tried to play down the   
   importance of the issue, arguing    
   that its “mandate is neither to make profits nor to avoid losses”—a   
   deflection that is disappointingly transparent to anyone familiar with central   
   banking.   
      
   The Fed traditionally avoided policies that would expose it to significant   
   losses. In the early years, member banks could borrow from reserve banks only   
   by posting specific collateral. The Federal Reserve Act required loans to be   
   backed by qualifying    
   short-term self-liquidating bills—what today we call commercial paper. Over   
   time, loan collateral requirements evolved, but as they did, the Fed   
   introduced policies to protect it from losses when lending to member banks.   
      
   When Congress or the executive branch tapped the Fed for emergency loans to   
   avert a wider financial crisis, it sought government guarantees to protect   
   itself from default losses. Franklin D. Roosevelt’s administration asked the   
   Fed to stand ready to    
   provide loans to banks that were allowed to reopen after the 1933 national   
   bank holiday. Instead of lending directly to these banks, the Fed proposed   
   that it lend to the Reconstruction Finance Corp., which could then lend the   
   proceeds to the newly    
   reopened banks—because the RFC had an explicit federal-government guarantee   
   that would protect the Federal Reserve system from potential losses should a   
   newly reopened bank fail.   
      
   Similarly, the Fed’s special lending programs in response to the 2008 and   
   2020 financial crises were undertaken only after the Treasury allocated funds   
   to absorb losses the Fed might incur from emergency loans. The latest Fed   
   special lending facility,    
   announced on March 12, also protects the Fed from lending losses. The first   
   $25 billion of losses incurred by this new emergency program (which lends   
   banks the par value of their underwater mortgage-backed securities and   
   Treasurys) will be covered by the    
   Treasury.   
      
   Avoiding credit losses is a requirement Congress added to the Federal Reserve   
   Act in 2010. Section 1101 of the Dodd-Frank Act requires the Federal Reserve   
   Board to establish “policies and procedures . . . designed to ensure that   
   any emergency lending    
   program or facility . . . protect taxpayers from losses.” Federal reserve   
   banks are also mandated to assign “a lendable value to all collateral for a   
   loan executed by a Federal reserve bank . . . in determining whether the loan   
   is secured    
   satisfactorily.”   
      
   While the Federal Reserve Act requires the Fed to avoid taking credit related   
   losses that could have an impact on taxpayers, it makes no mention of losses   
   from interest-rate risk exposures. The act’s authors never imagined such   
   losses. Monetary policy    
   was all but assured to generate Fed profits prior to 2008. That changed once   
   the Fed started paying banks interest on their reserve balances and making   
   large open market purchases of long-maturity Treasurys and mortgage-backed   
   securities.   
      
   Fed losses from its interest-rate-risk exposures—unrecognized taxpayer   
   losses—are now being realized in ways Congress never intended and at   
   magnitudes neither the Congress nor the Fed ever expected.   
      
   Mr. Kupiec is a senior fellow at the American Enterprise Institute. Mr.   
   Pollock is a senior fellow at the Mises Institute and a co-author of   
   “Surprised Again! The Covid Crisis and the New Market Bubble.”   
      
   https://www.wsj.com/articles/for-the-first-time-the-fed-is-losin   
   -money-mortage-backed-securities-treasurys-interest-rate-risk-svb-ad92e96f   
      
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