Why the Fed’s Unprecedented Losses Matter

The Federal Reserve’s risky policy has backfired

Letters to The WSJ. 

"Jason Furman’s “Profits and Losses Don’t Matter at the Federal Reserve” (op-ed, Sept. 28) gets it wrong in several respects. First, the loss of an average yearly profit of $75 billion certainly does matter when the national debt is already staggering.

Second, Mr. Furman seeks to justify the Fed’s quantitative-easing policy because it had the effect of “bolstering the economy” by depressing long-term interest rates. This foolish policy led to the asset-liability mismatch that placed the Fed in its current loss position and created the housing-market bubble that makes it so difficult for first-time buyers to purchase a home today. Keeping interest rates artificially low does juice the economy, but at the cost of a terrible later reckoning. We are experiencing this today in heightened inflation and asset bubbles.

You can praise the Fed for its current policy of raising rates to reduce inflation, but please don’t praise it for the mistakes that led it to have to take these drastic measures.

Howard B. Adler

Potomac, Md.

Mr. Adler served as deputy assistant Treasury secretary for the Financial Stability Oversight Council, 2019-21.

Mr. Furman excuses the Fed’s unprecedented losses, which have surpassed $100 billion on their way to $200 billion or more, suggesting taxpayers shouldn’t care. To the contrary, taxpayers should care that the Fed will spend, without authorization, $200 billion or more that will be added to their future taxes.

These Fed losses are the result of a radical and exceptionally risky Fed choice to build a balance sheet resembling a giant 1980s savings and loan. In the process, it stoked bubbles in bonds, stocks, houses and cryptocurrencies, in addition to inducing enormous interest-rate risk in the banking system. Those risks have now come home to roost.

Mr. Furman argues that the Fed’s negative capital position doesn’t matter. If so, why cook the books to avoid reporting it? The Fed books its cash losses as a “deferred asset” so that it can obscure its true negative capital position. The Fed changed its own previous accounting rules precisely so it could do so. We know what would happen if Citibank tried that.

Who authorized the Fed to take an enormous interest-rate bet, risking taxpayer money? Nobody but the Fed itself. Does “independence” give the Fed the right to spend hundreds of billions of taxpayer dollars without congressional approval? That question needs to be debated.

Alex J. Pollock and Paul H. Kupiec

Mises Institute and AEI

Lake Forest, Ill., and Washington"