Could QE3 Cause the Fed to Go Broke?

Each time the Fed undertakes a new program of quantitative easing, questions arise about the possible impact on its solvency. I addressed that concern in November 2010, at the time QE2 was announced. Here is an updated version of that post that looks at the solvency issue in the context of QE3.

The Fed’s new program of quantitative easing, QE3, once again raises an old question: Can central banks go broke? Conventional analysis, aptly summarized by Willem Buiter in a 2008 report, says “Never–Well, hardly ever.” The Fed is most assuredly not going to suffer a run or become unable to meet its obligations, but under some scenarios, keeping it from going going broke could raise difficult political issues and perhaps even threaten its independence. >>>Read more

Follow this link to view or download a classroom-ready presentation of the material from this post, including detailed balance sheets