Kenneth Lay and Jeffrey Skillings brought Enron to its knees and defrauded millions of shareholders by the practice of hiding losses from the Enron accounts through the creation and manipulation of ghost accounts. Both deviants eventually were brought to some kind of rough justice. Lay essentially committed suicide before his appeal could be heard, by abandoning his heart medication, in order to protect stolen property for family. Skillings currently luxuriates in a low security penitentiary in Colorado, hoping that he can purchase his way to freedom via a Supreme Court that is deemed to be soft on white collar crime and on all matters constitutional.
On depression-era economics, Ben Bernanke has earned an F grade, mis-reading every aspect of the Hoover and FDR years. However, he is proving to be a quick learner of Enron political economics. No doubt after corresponding with Andrew Fastow and Jeffrey Skillings, Bernanke has set up a false accounting system at the Federal Reserve. Applying misleading words to the new accounting system, Humpty-Dumpty Bernanke has designated his new accounting policy as providing a more transparent presentation.
The problem that confronts Bernanke, like the one that confronted Enron, is the large pending losses associated with the $2 trillion plus of securities that currently rot on the balance sheets of the Federal Reserve. If and when the Federal Reserve should lose sufficient money on these assets – either by selling toxic securities at a loss, or by raising interest payable on reserves to levels in excess of the returns on its dreadful portfolio, the Fed’s capital base of $52 billion would be wiped out. It cannot build up this capital base in good times, because it has a legal obligation to transfer immediately to the Treasury any amount above that $52 billion base.
In the absence of Humpty-Dumpty accounting rules, the Federal Reserve would then be forced to go to Congress to beg for money. Who can be sure that the present Congress would throw any dollar bills in its direction, at least without demanding some very senior resignations from the Fed? Ben Bernanke enjoys his power to promote progressive socialism and his limousine privileges far too much to expose himself to such an outcome. Hence the new accounting rules.
On January 6, 2011, the Fed released a deliberately opaque document entitled: ‘Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal reserve Banks’. Few commentators picked up on such an unsexy headline. Surely they should have done so.
Under the new accounting rules outlined in this document, any losses incurred by the Federal Reserve will not hit the capital account of the Fed. Instead, these losses will be allocated a new ‘Interest on Federal Reserve Notes’ item. The Fed’s capital, for book-keeping purposes, will remain intact. The Fed, hence, will have no obligation to transfer money to the Treasury to cover its losses until/if ever there are sufficient gains in its portfolio. The Fed will incur no dangerous necessity to take a begging bowl to a skeptical Congress, bearing a Dickensian placard: PLEASE SIR, I WANT SOME MORE’.
GAAP accounting rules do not allow private companies to get away with such accounting fictions. It is an even more dangerous practice in the hands of the Fed. For, if the Fed gets sufficiently deeply into the hole – as I expect that it will – ultimately it will repay the Treasury with newly-minted money, effectively monetizing its losses. This is the well-travelled road to hyper-inflation; the road that Ben Bernanke has surely chosen for the United States.
Hat Tip: Reuven Brenner, ‘The Federal Reserve: Fool Me Once, Shame On You…’ Forbes, January 30, 2011