Federal Reserve is broke now

With all the bailouts, one was always wondering what happens to Fed. How does it get the cash etc to bail out so many firms? Moreover, with Fed now accepting almost everything as collateral one was always going to question Fed’s balance sheet.   

Now it seems Fed has also run out of cash. FT Alphaville points (hat tip Eurointelligence) that US Treasury has taken out a special liquidity scheme to help Fed. The statement from US Treasury says:

The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week.  To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.

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.

I was thinking how will this help? On one hand Fed is providing liquidity and on the other Fed is draining that liquidity via the T-Bill auctions.

I also read New York Fed statement which says the same thing:

Today, the Treasury Department announced the initiation of a temporary Supplementary Financing Program. The program will consist of a series of Treasury bill auctions, separate from Treasury’s current borrowing program, with the proceeds from these auctions to be maintained in an account at the Federal Reserve Bank of New York. Funds in this account serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives.

This is pretty scary. I dont know what is going to happen ahead. There is news that Morgan Stanley (only 2 i-banks remain – Goldman Sachs and Morgan) also might be taken over by Wachovia or Citic (a Chinese Bank).

Funny times really. I r’ber reading when Chinese started oenoing up their financial sector in 2006, Morgan Stanley was one of the leading firms to help Chinese firms become more market oriented. Not in their wildest dreams would MS have imagined that they would need help from China.

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One Response to “Federal Reserve is broke now”

  1. Money market mutual funds next to shut shops? « Mostly Economics Says:

    […] far this crisis will go. After analysing why biggies collapsed (Lehman, AIG), I had mentioned about Fed going broke as […]

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