So finally, the Fed is taking home loans onto its balance sheet, a tool Bernanke proposed years ago to combat deflation. (Interesting, the list of reflationary tools proposed were: drop short-term interest rate, cap long-term rate, buy private debt, buy foreign debt, tax cut, and government purchases; so there are just a few more options left.)

Fed Easing Liquidity in Funding Markets

By Jeannine Aversa, AP Economics Writer

The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers — big Wall Street investment firms and banks that trade directly with the Fed — with 28-day loans of Treasury securities, rather than overnight loans. They would pledge other securities — including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac — as collateral for the loans of Treasury securities. Fed officials said that’s the first time they’ll be accepting mortgage-backed securities through this type of lending program.

Unfortunately, that does tend to make the Fed less credit-worthy, say if the banks were unable to repay their 28-day debts. And since the Fed is where the government keeps its money:

U.S. Treasuries Riskier Than German Debt, Default Swaps Show

By Abigail Moses

March 11 (Bloomberg) — The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.

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Which brings up the question of, what if the Federal Reserve runs out of money (i.e. has negative equity, or if that’s not convincing enough then the absolute worst case when all the assets it holds on its balance sheet become worthless)? Is that the bankruptcy event that needs the “full faith and credit of the US Government” to bail out? And if the US Government (which is in debt itself) had spent all current revenue, would not or could not issue more debt to raise more money, and had no federal assets to sell? At that time, there would be few choices for the US Government, some seemingly more palatable than others but really all the same:

• it could seize private property, otherwise known as raising taxes;
• it could renege on obligations, otherwise known as defaulting on outstanding bonds or cutting programs like Social Security;
• or it could inflate by directing the Federal Reserve to create the needed money in its account outright (might be just what is needed if there is insufficient debt creation) — this is most like printing money and the accounting trick is simply for the Federal Reserve to “agree” to “buy” worthless assets like new government bonds that nobody else wants and for the government to turn right around to “fund” the Federal Reserve with the new money it got.

And that brings the final question: Is the United States bankrupt?
(Read the article)

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Kind of a bizarre self-quizzing format, but informative:

Who is the Federal Reserve, who owns the Federal Reserve

and this,

Where does the Federal Reserve get the money to fund its operations?
(Read the article)

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