The Federal Reserve Becomes the ‘Buyer of Last Resort’

12/15/09 The Federal Reserve is pursuing a pernicious policy that is insidiously debasing the dollar. This policy has generally been met with indifference, if it has even been noticed at all.

The Federal Reserve is debasing the dollar by purchasing inferior assets of poor quality. These assets are mortgage-backed securities issued by federal agencies like the insolvent, and for all practical purposes bankrupt, Fannie Mae.

These are assets neither the banks nor private investors want. If there was a legitimate, real-world demand for these assets, the Federal Reserve would not need to buy them. But it is. Thus, instead of acting in its historical role as the “lender of last resort,” the Federal Reserve has on its own expanded its mandate to become the “buyer of last resort.”

By purchasing mortgage-backed securities, the Federal Reserve is debasing the dollar. Just how pervasive – and therefore serious – this debasement has become is apparent from the following chart prepared by BusinessInsider:

According to its latest report, the Federal Reserve now owns over $1 trillion of mortgage-backed securities, which is 45.6% of all assets on its balance sheet. One year ago mortgage-backed securities were only 0.6% of the Federal Reserve’s total assets!

The Federal Reserve is very highly leveraged, much more than most banks. It is carrying $2.15 trillion of debt on $52.8 billion of capital, giving it a leverage of 40.8-times more debt than capital. The Federal Reserve’s mortgage-backed securities alone, represent 19-times its capital, meaning that if the true value of these assets is 5.3% less than their book value, the Federal Reserve’s capital is wiped out, effectively making it another insolvent institution.

Given that Fannie Mae is itself insolvent and most other mortgage generating federal agencies are not far from perilously sliding down to that same dire financial condition, it is reasonable to assume that the true value of these mortgage-backed securities is less than 94.7% of their book values. Therefore, on a strict accounting basis, the Federal Reserve is probably insolvent.

That said, the Fed could always remedy its “insolvency” by creating more dollar bills for itself. And, in fact, the Fed is already in the process of doing this exact thing. How else could its assets have mushroomed from $800 billion last year to more than $2 trillion currently?

We call this “inflation.”

James Turk

James Turk is founder and chairman of GoldMoney, which provides a convenient and economical way to buy and sell gold, silver and platinum online using the digital gold currency for which he was awarded four US patents.  He has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics.  He began his business career with The Chase Manhattan Bank (now J.P. Morgan Chase), which included assignments in Thailand, the Philippines and Hong Kong.  In 1980 he joined the private investment and trading company of a prominent precious metals trader.  He moved to the United Arab Emirates in December 1983 to be appointed Manager of the Commodity Department of the Abu Dhabi Investment Authority, a position he held until resigning in 1987 to begin FGMR.

James Turk has written several monographs on money and banking and is the co-author of The Coming Collapse of the Dollar (Doubleday, 2004), now available in a paperback version entitled The Collapse of the Dollar.

View articles by James Turk

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