An ‘Open Scandal’ Is Seen at the Fed as It Fails To Address Questions Over Its Solvency — or Insolvency

The Federal Reserve’s “covering up its own insolvency with home-cooked accounting” is being called an “open scandal” by a leading newsletter, Grant’s Interest Rate Observer. It calls on the new Fed chairman, Kevin Warsh, to establish a sixth monetary task force to serve as “a kind of ‘truth and reconciliation’ repository” to “expose the facts” and call for the recapitalization of America’s central bank.The proposal, from a famously rigorous chronicler of interest rates in the era of the fiat dollar, would be for a task force above or apart from the five announced by Mr. Warsh shortly after he began his chairmanship. Grant’s suggests that “no reform is possible” without reference to first principles. The first principles he mentions include using, as the United States once did, gold and silver as the basis of bank capital.What makes Grant’s proposal newsworthy is not only its role as the leading newsletter on the beat. It’s also that it confronts directly the question of whether Mr. Warsh intends to address the question of gold. “Call it a first principle, and apply that dictum to the reconstruction of the Fed’s balance sheet,” the newsletter’s editor, James Grant, writes in its July 17 number.Mr. Grant has been warning for years about the Fed’s balance sheet. “The Fed has lost money on its fixed income holdings, bond holdings, far in excess of what it shows in stockholders equity, and it has lost in operating income far more than it shows,” Mr. Grant recently told the Sun. Mr. Grant says the Fed would be insolvent if it were not for the Treasury agreeing to stand up for its losses. “Ironically enough, the guardian of the American banking system is itself in a state of solvency by courtesy,” Mr. Grant said.The Fed reported large net losses for the three calendar years 2023, 2024, and 2025. The losses total the “egregious sum” of $211 billion, our columnist Alex Pollock wrote last month in the Sun. Mr. Pollock has called the Fed’s losses “mind-boggling.” He notes that the Fed uses a special accounting treatment for itself which it would never allow its regulated banks to follow.Grant’s latest newsletter says the Federal Reserve note is not a promise to pay anything. That’s because it is not tied to any underlying collateral. A reversion to legacy coin, though, would restore its value, Grant’s reckons. It goes on to suggest that a recapitalization with gold and silver would rehabilitate the Fed and renew confidence enough to allow interest rates to fall.Mr. Warsh, in any event, has already established five task forces. The first would review how the Fed conveys policy deliberations and decisions. The second would examine the costs, benefits, and implications of its current balance sheet regime.The third would improve the quality of the data it uses for policy judgments, the fourth would assess the impact of new technologies to inform the central bank’s policy judgments, and the fifth would revisit how the Fed understands and responds to drivers of inflation.

An ‘Open Scandal’ Is Seen at the Fed as It Fails To Address Questions Over Its Solvency — or Insolvency

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