There is simply no way out: The Fed is leveraged 77:1

Looking back at 2008, everyone now recognizes that the problem was too much leverage.   But how much leverage was too much leverage?

Prior to the crisis, leverage ratios had reached critical levels.  Bear Stearns was leveraged a whopping $42 in debt for every $1 in equity just prior to collapse.

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Investment banks typically carry higher leverage, and leverage increased dangerously before the crisis.


So if 42:1 leverage was a big deal… how are we supposed to feel about the Federal Reserve whose leverage is almost double that?   Today, The New York Times, asks with a profound lack of alarm:   “Can the Fed go down the tubes, in the same way that Bear Stearns, Lehman Brothers and Merrill Lynch did”?

In the midst of the Federal Reserve’s creative but controversial quantitative easing program — the five-year plan of buying billions of dollars in debt securities each month and forcing down interest rates to historically low levels — the central bank’s balance sheet has ballooned to nearly $4.3 trillion in assets from $800 billion, leaving one large unanswered question hanging over the marketplace: What does the Fed intend to do with all those bonds?

Can the Fed’s equity capital of $56 billion — yes, the Fed is leveraged 77 to 1 — be wiped out? A mere 1.3 percent change in the value of those $4.3 trillion in bonds would theoretically wipe out the Fed’s equity. Can the Fed go down the tubes, in the same way that Bear Stearns, Lehman Brothers and Merrill Lynch did?

Answer:   Yes.

To be clear: The Federal Reserve cannot possibly exit from the corner it has painted itself into.  All proposals to the contrary are simply not credible, have no basis in history and involve far too much hand waving and wonkish postulating to be a part of any rational set of predictions.

The Federal Reserve's "plan" is to have no plan.

The Federal Reserve’s “plan” is to have no plan.


Let’s be clear:  Financial policy in the USA is currently being set by radicals.   

These are not conservatives.  These are not even responsible adults.  These are radical theorists who are testing historically unprecedented policies which have no basis in reality, and for which the supporting evidence has yet to materialize.  In fact, the evidence of their outright failure continues to flood in on a daily basis.

Furthermore,  every one of their policy initiatives has failed thus far, and required an equal or greater round of “QE” to stave off the implosion that must naturally follow.

A long series of failures, followed by ridiculous predictions.

A long series of failures, followed by ridiculous predictions.


Which brings us to today:  Now the Federal Reserve is leveraged 77:1  (or nearly twice the level of Bear Stearns).  And they’re really not even trying to pretend there’s an exit plan, because they already know it will fail.

The entire rationale behind a private Federal Reserve system is to prevent excessive debt/leverage from building up in the system. And yet under the radical and historically-unprecedented policies of Mr. Bernanke, the Federal Reserve is now leveraged a whopping 77:1 and lacks any trace of an exit plan. The road we’re on isn’t just “one way” that empires collapse. This is the typical way.

It is time to replace the radicals in the Federal Reserve with responsible adults who recognize that banks must be allowed to fail, and that those who take on systemically dangerous amounts of leverage must be tried, found guilty and jailed.



  • Al Tinfoil

    One question: Leveraged against what? Supposedly, Bear Sterns was “leveraged” against real capital, or what was considered to be “real capital” in the banking world within the US.
    So, what is the “capital” held by the Fed that the Fed is leveraged against? Is it anything more than paper IOUs from bankrupt governments? If so, the Fed’s capital accounts hold nothing of real value, so any lending the Fed makes represents an infinite leverage ratio. Rampant fiat money-printing has debased the US dollar, similarly rampant deficit and debt accumulation has debased the credit of the US government, so US government bonds are similarly debased. The same applies to the British Pound and the Euro. If the Fed’s capital account holds real assets like food, land, productive facilities, precious metals or commodities (petroleum, copper, iron, cobalt, etc.) or other real assets, then a serious discussion of the Fed’s leverage against its capital account can be held. But to speak of leverage against paper shows that the speaker is trapped within the banking paradigm of double-entry accounting and financialization – once you look outside this box, you see how shaky is the house of cards.
    Since lending by the Fed involves only money it invented from thin air, Fed leveraging in the present context is meaningless – an empty concept. It costs the Fed nothing to create more money, so the Fed can go on printing money at no cost except the debasement of the currency and the currency-based paper “assets” it holds. Only those who carry on the charade of financial accounting see any meaning in the Fed’s balance sheet. The danger in all this lies in the fact that the “money” the Fed creates is regarded in real-World markets as having purchasing power, so it can be used to purchase and control real-World assets needed by the population, and is a powerful tool in our excessively financialized World, where speculative money flows can wreak havoc.
    The central banks and the countries they service are locked in a fatal embrace, a vortex of QE and debt, awash in a sea of excessive liquidity, infested with sharks seeking nourishment in the form of returns.

  • 19battlehill

    I dont know why it is so complicated – YOU CAN’T TAPER A PONZI SCHEME, and every time they try, well you see what happens it starts to collapse so they start printing again. This is all going to end eventually and when it does it won’t be pretty. The surprise it that it went on for this long.

  • lukesly

    LOL now it is up to 111 to 1