Does the Fed use H&R BLOCK accountans?

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 average amount of year-end reserves for loan losses of all banks insured by the Federal Deposit Insurance Corp. in 2008 was 1.2 percent of assets. A comparable measure at the Fed would have caused an expense provision of $26.9 billion. Instead, a comprehensive loss of only $4.7 billion was recognized and charged against current income, despite the Fed's much riskier array of assets

When the economy recovers, the demand for bank loans also will recover. At that point the excess reserves could fuel an explosion of bank lending with accompanying inflationary pressures.