Federal Reserve going bankruptSubmitted by meekandmild on Thu, 02/28/2013 - 17:48
There has been a lot of uncertainty as to what the Fed going insolvent actually means. Traditionally central banks are supposed to be self-funded, their expenses are meant to be paid out of interest earnings. In times where the Fed has been or is anticipated to be short on capital, the Treasury has provided supplementary financing to the Fed.
The threat of a Fed insolvency is more a political issue than anything technically impairing to the Fed in terms of continuing operations. The Fed's liabilities are not redeemable so they can never become cash flow insolvent in a bank run environment one normally associates with a bank bankruptcy. The Fed has infinite power to issue further liabilities so is in no way technically restrained by having the capital wiped clean. The Fed can easily fund operations internally by issuing liabilities, though indirect routes are more likely to be taken to skirt the political mess associated with such a scenario.
Whether the Fed can legally operate without seeking financing from the Treasury in the event their capital is wiped thin is the biggest question that still remains. I wish this would be addressed to the Fed chairman, or preferably the Fed's legal council directly so we can finally validate where the Fed stands given a capital deficiency.