Tuesday, September 16, 2008

Will The Fed Sterilize The $85 Billion AIG Bailout?

It is very likely the Fed will do so, that has been the modus operandi of the Ben Bernanke Fed. 

Rather than print new money for its bailouts, the Fed has been using the Treasury securities in its portfolio, i.e. sterilizing the bailouts, but that portfolio has been dwindling of Treasury securities as the bailouts and  "special credit facilities" draw on that portfolio. Exactly one year ago, the Fed held $779 billion in  Treasury securities. As of last week, the portfolio holds $479 billion. An $85 billion drawdown of that portfolio takes it down to $394 billion.  Ouch. The portfolio has been cut in half in the last year. 

The Fed only has $394 billion for bailout sterilizations, after that the Fed has one option, money printing, with all its ugly inflationary ramifications.

-Robert Wenzel

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