Today at Mises I walk through my understanding of the Fed’s January 6 accounting rule change. My take is that the Fed’s description sounded like no big deal, because they implicitly focused on the treatment of earnings. What they didn’t mention was that their rule change shielded them from losses.
One thing: Some analysts have claimed that the Fed’s rule change would move losses on assets “from the left side of the balance sheet to the right.” I don’t think that’s correct. I think they will still mark down their assets, but instead of making a corresponding debit to their capital (on the right hand side), they will put in a negative entry under their liabilities (also on the right hand side). So the action is on the right hand side, moving something from one category to another. I don’t think the rule change affects the treatment of the left side at all.