Wall Street Journal: Federal Reserve Weighs Creating it's Own Debt

I've written many times that we will see things in 2009 we would never believe or indeed be able to think of as the economy degrades, and the government grows more desperate. I must confess, this headline from the Wall Street Journal was a jaw dropper and something I never considered. Mind boggling indeed - now the US Treasury and the Federal Reserve are going to be competing in the debt market? I can't even wrap my mind around the potential implications so I don't have any analysis for you here. I'm not sure why they would even consider this when they can print money all they want; quantitative easing if you want the technical term. (Please note the Federal Reserve is not officially part of the desperate "government" - in fact they are a *cough* independent entity free of *ahem* political pressure)

Here is the greater takeaway for 2009, 2010, 2011 - the government/Fed has immersed itself into our markets to such a high degree, how will they back away so we ever get back to the way things "used to be?" When will they do it? How will they do it? Are they crowding out private investment? Are they killing efficiency of capital distribution? How are we not like Japan? Etc.

• The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets. Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.
• Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.
• One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency. Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up with new ideas.
• At the core of the deliberations is the Fed's balance sheet, which has grown from less than $900 billion to more than $2 trillion since August as it backstops new markets like commercial paper, money-market funds, mortgage-backed securities and ailing companies such as American International Group Inc.
• The Fed also has turned to the Treasury Department for cash. Treasury has issued debt, leaving the proceeds on deposit with the Fed for the central bank to use as it chose. But the Treasury said in November it was scaling back that effort. The Treasury is undertaking its own massive borrowing program and faces legal limits on how much it can borrow.
• More recently, the Fed has funded programs by flooding the financial system with money it created itself -- known in central-banking circles as bank reserves -- and has used the money to make loans and purchase assets.
• Some economists worry about the consequences of this approach. Fed officials could find it challenging to remove the cash from the system once markets stabilize and the economy improves. It's not a problem now, but if they're too slow to act later it can cause inflation.
• Some private economists worry that Fed-issued bonds could create new problems. Marvin Goodfriend, an economist at Carnegie Mellon University's Tepper School of Business and a former senior staffer at the Federal Reserve Bank of Richmond, said that issuing debt could put the Fed at odds with the Treasury at a time when it is already issuing mountains of debt itself. "It creates problems in coordinating the issuance of government debt," Mr. Goodfriend said. "These would be very close cousins to existing Treasury bills. They would be competing in the same market to federal debt."
• There are also questions about the Fed's authority. "I had always worked under the assumption that the Federal Reserve couldn't issue debt," said Vincent Reinhart, a former senior Fed staffer who is now an economist at the American Enterprise Institute. (all our assumptions are now moot Mr Reinhart)