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The Fed’s Financial Accounting Is a Beautiful Thing

Controllers, don’t you wish you had this sort of authority? Imagine writing your own financial accounting handbook (forget GAAP, it doesn’t apply here!), plugging your financial statements with all the footnotes you want and rewriting the rules in the middle of the reporting season just because you feel like it and, maybe in this case, because it will paint a rosier picture of your financial condition.

Wouldn’t it be great if we could do this with our checking accounts? You could just take the money that is owed to others (let’s call “bills” “negative liabilities” instead, even though in strictly technical terms a negative liability would be an asset, which we know bills are not) and change its name, give it a new presentation and VOILA! Instant solvency!

On January 6th, they tried to sneak a little change in presentation that, for now, doesn’t really matter but might when interest rates skyrocket and they are no longer handing out huge amounts of “profits” to the Treasury. Read:

Effective January 1, 2011, as a result of the accounting policy change, on a daily basis each Federal Reserve Bank will adjust the balance in its surplus account to equate surplus with capital paid-in and, in addition, will adjust its liability for the distribution of residual earnings to the U.S. Treasury. Previously these adjustments were made only at year-end. Adjusting the surplus account balance and the liability for the distribution of residual earnings to the U.S. Treasury is consistent with the existing requirement for daily accrual of many other items that appear in the Board’s H.4.1 statistical release. The liability for the distribution of residual earnings to the U.S. Treasury will be reported as “Interest on Federal Reserve notes due to U.S. Treasury” on table 10. Previously, the amount necessary to equate surplus with capital paid-in and the amount of the liability for the distribution of residual earnings to the U.S. Treasury were included in “Other capital accounts” in table 9 and in “Other capital” in table 10.

So instead of counting up the amazing Fed profits to the Treasury every year like they’ve done for as long as we can remember (and lately with lots of huge fanfare and fireworks, including the last record $78.4 billion), they’ll be readjusting the numbers on a weekly basis. Why they feel this is appropriate is beyond my analytical ability but should anyone have some insight, I’d love to hear it.

In the meantime, I guess it is reassuring to know that accounting tricks or not, the Fed can’t possibly be insolvent.