Bernanke’s legacy: Fed set to lose $500 billion
Published time: February 27, 2013 22:53
TagsBanking, Economy, Government Spending, USAEconomists predict that the US Federal Reserve could lose half a trillion dollars in just three years thanks to policies enacted by the central bank under Chairman Ben Bernanke. A study conducted by investment analysts at New York City’s MSCI
Inc. suggests that Mr. Bernanke’s efforts to keep the floundering
economy in tact on the heels of a recession have proven to be
futile and will continue to collapse.According to
Bloomberg News, who contracted MSCI to conduct the study, the
potential losses the Fed could see during the next three years are
“unprecedented.” MSCI says the market values of Fed holdings
are likely to shrink by $547 billion during that span.The group says they concluded as much after using stress-test
scenarios designed by the central bank to examine how the value of
securities held in the Fed’s portfolio at the end of 2012 will
stand up during the next few years. In a situation involving
economic contraction and rising inflation, MSCI expects the Fed’s
holdings to drop drastically by more than half of a trillion
dollars.Should conditions improve, however, losses may not amount to
that substantial of a figure. If the economy performs “in line
with consensus forecasts of gradually rising growth, inflation and
interest rates,” reports Bloomberg, the mark-to-market loss
during the next few years could amount to ‘only’ $216 billion.
Sarah Binder, a senior fellow at the Brookings Institution, tells
Bloomberg that either way she expects a hostile response from
Washington.“Even if there’s a perfectly logical explanation and the
normalization of the balance sheet is a good thing in the long
term, the headlines will probably generate congressional
scrutiny,” she says. “That’s never a good thing from the
Fed’s perspective.”So far, though, the central bank has stayed optimistic. Speaking
in Washington on Tuesday, Bernanke told the Senate Banking
Committee that the Fed “remains confident that it has the tools
necessary to tighten monetary policy when the time comes to do
so.” At least one lawmaker, though — Sen. Bob Corker
(R-Tennessee) — is skeptical. Hours after Bernanke’s address, he
sent a letter to the chairman asking, “Do we have a serious
policy problem brewing here, or is this simply an optics problem
about which we should not be concerned?”Others have reacted positively to Bernanke’s remarks and have
said his confidence could be a good think. His comments did not
affect the price of oil on Wednesday morning, and the Sucden
Financial Research said that the chairman’s statement may have had
something to do with keeping the cost of crude from rising.”It seems that the optimistic comments from Bernanke
overshadowed the political uncertainty of the Eurozone and raised
hopes about a possible rebound in the oil demand for the rest of
2013,” the report reads.Whether Bernanke’s predictions prove to be correct is another
story, though. According to the MSCI report, the chairman’s
policies are on track t
2000
o cause the Fed to lose a substantial loss
in a short amount of time. Bernanke says his policy of “credit
easing,” or buying back debt from the Treasury and federal housing
agencies, as well as mortgage-backed securities, is key to
improving the economy. As interest rates ride, however, returns
from the Fed’s holdings are sharply shrinking.“The political backlash could be particularly acute given
that a good portion of the funds that would otherwise be remitted
to the Treasury would be transferred to large financial
institutions in the form of interest paid on reserves,”
Laurence Meyer, a former Fed governor and co-founder of
Macroeconomic Advisers LLC in St. Louis, adds to Bloomberg.
“This could present a significant communication challenge for
the Fed and adversely impact its reputation.”Bernanke’s second four-year term as Federal Reserve chairman
expires next year and he has not announced his plans for the
future. Speaking to the Senate, however, Bernanke did say that he
thinks the Fed should continue with its current policies,
regardless of how some economists think it will work.“To this point we do not see
the potential costs of the increased risk-taking in some financial
markets as outweighing the benefits of promoting a stronger
economic recovery and more rapid job creation,” Bernanke
said.Should the “unprecedented losses” predicted by MSCI occur,
though, the bank might start to see those risks. The New York Times
reports that losses in the hundreds of billions could mean the Fed
would be unable to move profits to the US Treasury Department for
the first time since the 1930s.Share on Tumblr … Read More
