Behold, the Awesome Power of the Federal Reserve

That is not intended as a snarky title.  We are seeing the full power of the Fed come to bear in this financial crisis.  There is a reason why they have said for decades, “Don’t fight the Fed”.

The Fed’s power comes from the ability to almost limitessly create assets and money supply, with a charter to do so.  As long as the Treasury cooperates, the Federal Reserve effectively has the full balance sheet of the United States to work with.  And that’s a big balance sheet.

A lot of noise was made in the past months about the “limited” firepower of the Fed.  After all, they technically had assets of only $800B in Treasuries as of August 2007, and we’re dealing with a problem measured in trillions.

The Econoblog has a great post today on how the Federal Reserve balance sheet has shifted, particularly in the past 30 days.  It’s fairly wonky, but if you are into how modern money supplies are managed, I haven’t seen a better article:

Econobrowser: Balance Sheet of the Federal Reserve

You can read it for yourself if you are interested, but the short story is that the Federal Reserve has inflated its balance sheet to over $1.5 Trillion, with a lot of that growth happening in the past few weeks.

Check out this graph, from MacroBlog:

At this point, Bernanke and Paulson are basically calling in all the King’s horses, and all the King’s men.  Let’s hope they can put Humpty Dumpty back together again.

One fun fact – the amount of reserves that banks are now sitting on – not lending, not converting to cash, but just sitting on is approximately 2.5x the amount that got locked up post-9/11.   Unprecedented.

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