Among the most contentious of federal accounting issues is how the Federal Reserve System should be accounted for in the Financial Report of the U.S. Government.
1. Review a recent balance sheet of the Federal Reserve System ("Federal Reserve Banks Combined Statements of Condition"). The financial statements of the Federal Reserve System can be found on the systemweb page (for 2020: https://www.federalreserve.gov/aboutthefed/files/ combinedfinstmt2020.pdf).
In reviewing the balance sheet, be sure to examine that of the Federal Reserve System Banks Combined, not that of the Board of Governors.
a. What is the single largest asset of the Federal Reserve System; what is the single largest liability?
b. Suppose that the government were to consolidate the financial statements of the Fed with its other assets and liabilities. How would the largest asset and liability of the Fed affect the government's reported assets and liabilities? Would consolidation of those items increase or decrease the net financial position of the government? Explain.
2. What arguments can you make both for and against consolidating the Fed?