By Vicki Needham - 05/24/10 09:38 PM EDT
The fair-value estimates address the costs but not the benefits of the Fed's actions, and if the central bank hadn't stepped in to prop up the financial system by providing liquidity, the "financial crisis would have been deeper and more protracted and the damage to the rest of the economy more severe," the report said.
CBO hasn't attempted to estimate the benefits but predicts the benefits of the stability-inducing actions will exceed "the relatively small costs of fair-value subsidies."
Before the financial crisis, the Fed held about $900 billion in assets, mostly in U.S. Treasury securities, acquired during normal operations of monetary policy. During the financial crisis, the Fed expanded its balance sheet, accumulating about $2.3 trillion in assets by the end of 2008, with about $1.7 trillion providing support for the financial system.
By the end of 2009, direct loans to financial institutions had fallen to about $280 billion, while holdings of mortgage-backed securities increased to around $1 trillion.
The Fed won't begin selling off those assets until after raising interest rates, which isn't expected to happen in the near term, according to its annual report released Monday.
The major liability on the central bank's balance sheet before the crisis in 2007 was about $814 billion in circulating currency. At the end of last year, the amount of reserves that banks held with the Fed was the largest liability, standing at more than $1 trillion, Elmendorf said.