Wednesday, November 28, 2012


Can a central bank lose money? Unfortunately, yes, it can. Zero Hedge's Tyler Durden points us to just one example across the Pacific. 

Japan's central bank just reported an operating loss of ¥183.4 billion and a net loss of ¥232.9 billion ($2.83 billion) for the first half of the 2012 fiscal year. This is ¥96 billion more than it lost in the same period last year. Incredible. 

I know what you all are thinking. Aren't central banks supposed to have just one, very simple, job? Yes, and it's tied to protecting the integrity of the currency.

So how did the Bank of Japan lose so much money? Good question. Part of the reason for the size of the Bank of Japan's losses is pretty simple. The size of the banks balance sheet (assets/liabilities) has been growing for some time, and now stands at well over ¥155 trillion ($1.89 trillion) ... 

It makes sense that if you have a big balance sheet losses might be large too. But the real problem isn't the size of it's asset base. It's quality. It's what's in those assets. Simply put, the Bank of Japan has been purchasing risky assets to help stabilize markets. 

Sound familiar? 

More specifically, over the past few years the Bank of Japan bought large amounts of toxic financial crap created by incompetent market players in real estate and "exchange" markets (called REIT and ETF markets). You know, just like our central bank, the Federal Reserve, has been doing the past four years. 

Some of you might be saying, "But aren't central banks supposed to be in the business of protecting the integrity of the currency, and nothing else?" On this you would be absolutely correct. 

Unfortunately central banks like the Bank of Japan and the Federal Reserve have become glorified ATMs for some of the world's largest financial institutions. In return for their failed market instruments (and other toxic crap) large financial institutions get to belly up to the ATM central bank bar and pull out fresh cash reserves. 

Some of you might be saying to yourselves, "That's alright, the central bankers know what they're doing. They've been watching the numbers." Think again ... and this is especially the case when it comes to the recent history of the U.S. Federal Reserve.

Here's Rep. Alan Grayson (D-FL) during his first term grilling Federal Reserve Chairman Ben Bernanke. He's asking what happened to half a trillion dollars that the Federal Reserve created for Europe (1:20) ... 

As if not knowing what happened to half a trillion dollars wasn't enough here's Alan Grayson questioning the Federal Reserve's Inspector General about trillions (much of it in credits) that suddenly appeared on the Federal Reserve's books. As you will see (3:14), the Inspector General has no clue about the trillions in credit that's been extended by the Federal Reserve ... 

Long story short, central banks can lose money. Lots of it. The Bank of Japan is doing it. So is the Federal Reserve. Our problem is that the vast majority of the general public (in Japan and the U.S.) has no real idea how any of this works, so the private sector continues to pass their toxic crap off to central banks in exchange for fresh cash

This is just one reason why our real threat isn't with the "welfare queen" sucking chump change off the system in the Bronx. It's the financial kingpins on Wall Street, sucking trillions off the system in Manhattan, who are burning down the house.

- Mark 

P.S. If you're wondering what the Federal Reserve's balance sheet looks like since it began extending credit and making massive purchases of toxic assets take a look at this ... 

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