17 Mar. 2008

How Did It Come To This?

Michael West says the Fed's cred is on the line:
It has about $US800 billion in greenbacks outstanding - against its $US800 billion in treasuries. It is not open to them to print another $US400 billion in greenbacks without seriously letting inflation go. Do that and there is no monetary credibility left. They have no choice but to lend treasuries...

The dilemma runs like this. If the Fed runs out of treasuries, the system is in dire straits. The Fed could print money but inflation would spiral out of control. Another possibility - the one everyone is hoping for - is that we are near the bottom and things recover. Or, as some are mooting, the US Congress could get involved and effectively buy mortgages by issuing more treasuries.