Imagine the new Fed Chair making history with this appearance on TV:
[Camera shot of an announcer, speaking from the Federal Reserve building in Washington, D.C.]
Announcer: We are presenting a special broadcast tonight for an announcement by Janet Yellen, the new Chair of the Federal Reserve System.
[Camera shot of Janet Yellen, at the Federal Reserve building.]
Janet Yellen: Good evening!
Once again, our nation is caught up in a debate over raising the debt ceiling. On February 3rd, U.S. Treasury Secretary Jack Lew pleaded for yet another increase. Unless Congress acts before the end of February, America will default on its legal obligations. Spending by the US government must be authorized by Congress. But Congress continually balks at raising the debt ceiling, preventing the borrowing required for spending it has already approved.
The Federal Reserve, acting on its own, can end this foolish debate, not just this once, but forever.
Behind me, you will see a wire cage, full of papers. [The camera pulls back to show a wire cage behind Yellen, then moves in closer to the cage.] The papers in the cage are US Treasury Bonds, owned by the Federal Reserve System. [The camera returns to a head shot of Yellen.] The US national debt totals $17.3 trillion, and the Federal Reserve holds about $3 trillion of that debt in the form of US bonds it bought on the open market.
Any bonds issued by the government that cannot be presented for redemption are canceled, and the debt they represent is simply eliminated. So if the Fed destroys its US bonds, the national debt would be reduced automatically by the value of the bonds destroyed: about $3 trillion.
The Federal Reserve System has decided to destroy the US bonds it owns. The destroyed bonds will never be presented for redemption. As you can see, we are burning them up. [The camera shows the papers in the wire cage beginning to burn, quickly turning into a conflagration. A blaze of glory.]
Burning up the bonds reduces the national debt by some $3 trillion, to well below the current debt limit. The government can now pay its bills.
The assets of the Federal Reserve must of course be decreased by the value of the bonds destroyed. But we can do that easily -- it's just a matter of entering some keystrokes. [Camera shows hands at a keyboard typing numbers into a computer.]
Can the Federal Reserve just do this? Yes. No government authorization is needed.
[Camera returns to a head shot of Yellen.] You ask, "But what about the decrease in assets? Can the Fed afford to reduce its assets that much?"
Yes, the Federal Reserve can afford the necessary decrease in assets. It simply reverses the increase in assets it made to buy the bonds in the first place. The money to buy the bonds on the open market was created by a similar keyboard entry -- assets were simply increased by the amount of money needed to buy the bonds. Those assets came from nowhere, and we can as easily make them disappear back into that nowhere.