the Treasury is applying some elbow grease too. From Bloomberg:
The U.S. Treasury said it will sell bills to allow the Federal Reserve to expand its balance sheet, a day after the government agreed to take over American International Group Inc.
“The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve,” the department said in a statement today. “The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program.”
Needless to say, expanding the Fed’s balance sheet is inflationary. The Federal Reserve chairman is employing the remedy he has long recommended, that a determined central banker can always reflate. If he is right, bye bye dollar, but in 1930, the central bank increased bank reserves but money supply contracted nevertheless because consumers and business hoarded cash due to distrust of failing banks. If the run on the shadow banking system continues, we may see similar results even though traditional bank will (hopefully) not see a cash exodus.
Update 11:30 AM: FT Alphaville, putting none too fine a point on it, calls its post “The Fed’s run out of money,” and provided the text of the Treasury’s press release. This bit caught my eye:
The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.
“Temporary”. If you believe that, I have a bridge I’d like to sell you….
In all seriousness, just like the Term Auction Facility and the other supposedly temporary special facilities, it will be very hard to wean the financial system off central bank support.