With its Treasury assets low, the Fed is considering issuing its own debt, something it's never done before, and may be prohibited by law from doing. The central bank has seen its balance sheet more than double, to over $2 trillion, and is trying to come up with added flexibility.
This is a spectacularly bad idea, so I'd expect to see enabling legislation on the President's desk by next week.
Anyone who buys Fed debt would be basically buying all those risky assets - plus whatever new risky assets the Fed decides to backstop tomorrow. The market doesn't think much of those securities, which is why the Fed had to step in and buy them in the first place. On the open market, they'd have insanely high yields and minimal value. What the Fed is proposing to do is to remarket those securities, in effect as CDOs without the tranches, rebuilding the house of cards that got us into this problem in the first place.
Any difference between the yield those securities would be required to pay on the open market and the interest rate the Fed would have to pay would be - totally and completely - based on the public's confidence in the US Government's ability to cover those costs. In other words, you and me.
There are also almost certainly conflicts of interest (so to speak) between the Fed's role as a stabilizer of the debt markets and its role as a participant in them. It's one reason the Fed has been independent, with the ability to tighten money and drive up borrowing costs largely without interference from the Treasury. The Fed as debtor may be much less willing to fight inflation.
This is a spectacularly bad idea, so I'd expect to see enabling legislation on the President's desk by next week.
Anyone who buys Fed debt would be basically buying all those risky assets - plus whatever new risky assets the Fed decides to backstop tomorrow. The market doesn't think much of those securities, which is why the Fed had to step in and buy them in the first place. On the open market, they'd have insanely high yields and minimal value. What the Fed is proposing to do is to remarket those securities, in effect as CDOs without the tranches, rebuilding the house of cards that got us into this problem in the first place.
Any difference between the yield those securities would be required to pay on the open market and the interest rate the Fed would have to pay would be - totally and completely - based on the public's confidence in the US Government's ability to cover those costs. In other words, you and me.
There are also almost certainly conflicts of interest (so to speak) between the Fed's role as a stabilizer of the debt markets and its role as a participant in them. It's one reason the Fed has been independent, with the ability to tighten money and drive up borrowing costs largely without interference from the Treasury. The Fed as debtor may be much less willing to fight inflation.
