More Secret Than Sensible; Accounting Methods Block a Clear View

The Washington Times (Washington, DC), July 15, 2009 | Go to article overview

More Secret Than Sensible; Accounting Methods Block a Clear View


Byline: William F. Ford and Walker Todd, SPECIAL TO THE WASHINGTON TIMES

During 2008, the first full year of the recession, the Federal Reserve system expanded its balance sheet by $1.33 trillion, or 145 percent. The Fed also took on hundreds of billions of mortgage-linked assets with high-default risks, often in exchange for its own low-risk, short-term U.S. Treasury assets.

Because the scale and complexity of these activities raise serious concerns, outside observers should scrutinize the Fed's every move. But the Fed's distinctive in-house accounting standards make it difficult for outsiders - including Congress - to evaluate the Fed's monetary and lending operations and how they might increase the risk to taxpayers.

The Fed's activities need to be more transparent. This could be accomplished at least in part by requiring the Fed to use the same Generally Accepted Accounting Principles (GAAP) used by commercial banks and other private companies.

The lack of GAAP conformity has hardly mattered in the past because the Fed's annual balance sheet and income statements didn't entail serious transparency issues.

All that changed in mid-2007, when the Fed rapidly expanded its assets via some major changes in the credit risk and liquidity profiles of its balance sheet. Outside observers now have to read between the lines to estimate the real costs and benefits of the Fed's recession-fighting programs.

Consider two examples. One involves the Federal Reserve's ratio of liabilities to reserves. The second involves the low quality of the newly added - typically mortgage-linked - assets.

The Fed's use of leverage increased dramatically during 2008, from 24:1 to 53:1. This left the Fed with about the same tiny capital ratio as Fannie Mae, Freddie Mac and Bear Stearns just before they failed. The Fed, however, cannot fail, because its obligations are backed by the full-faith-and-credit of the federal government - in short, by the power to tax.

If the Fed were a commercial bank, its deeply diminished capital - below 2 percent of assets - would subject it to prompt corrective action, including seizure by federal bank supervisory authorities. In 2008, the Fed would have had to add more than $54 billion to its capital accounts to maintain the same approximately 4 percent capital-to-assets ratio as at year-end 2007. It added only $2.6 billion.

An important difference between GAAP and the Fed's accounting system is the absence of reserves for loan losses stemming specifically from the Fed's large and growing pool of high-risk assets.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

More Secret Than Sensible; Accounting Methods Block a Clear View
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.