But what if the Fed itself needed to be bailed-out? The Fed may be a central bank, but it is still a bank with a balance sheet and capital. A balance sheet has two sides consisting of assets and liabilities. The Fed’s assets are mostly government securities it buys and its liabilities are mostly the money it prints to buy them. Capital consists of the assets minus the liabilities.
The Fed has capital of about $60 billion and assets approaching $3 trillion. If the Fed’s assets declined in value by just 2 percent, that decline applied to $3 trillion in assets produces a $60 billion loss—enough to wipe out the Fed’s capital. A 2 percent decline is not unusual in today’s volatile markets.
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