Janet Yellen has been kind enough to put together a very nice chart of the Fed's Balance Sheet showing its degradation in support of the Wall Street banking bailouts. Thanks to CalculatedRisk for spotting it. We were working on a version of this but once again the principle of procrastination has served us well and delivered more time to play Halo 3 with the youngsters.
The Fed has consumed about half its reserves to prevent a domino crash in the financial system, and a probable stock market crash. It would have been rather messy. Before we pin hero medals on the Fed for avoiding it, let's remember who was a central actor in creating the situation we face today, which is only deferred, not cured.
So, 1400 on the SP 500 is what you can buy for 400 billion these days, plus a few hundred billion if you toss in the efforts of Treasury and their friends.
Next step will be to start playing with commercial bank balances if the Fed can start paying interest on them, and of course the direct monetization of debt if they can work out the right working relationship with the Treasury on this that only bends existing statutes which are sufficiently vague to allow for the creation of a pure money machine if bent under duress.
As we have observed on several occasions, the limiting factor on the Federal Reserve will be the value of the dollar and the acceptability of US sovereign debt by enough foreign trading partners to make it meaningful. That spells O-I-L.
FRB H.41 - Factors Affecting Reserve Balances
