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Fed’s balance sheet tops $2 trillion as rescue tab rises

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Here’s one way to keep tabs of the cost of the financial-system bailout: Watch how the Federal Reserve’s balance sheet expands.

The Fed’s ledger now has swelled to more than $2 trillion in assets -- mostly in outstanding loans to banks and other financial companies, according to a weekly report from the central bank that is nicely summarized by George Goncalves, government bond strategist at Morgan Stanley in New York.

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The flip side is that the Fed also has more than $2 trillion in liabilities, including financing supplied by the Treasury (i.e., taxpayers) and cash reserves on deposit from banks.

Before the various bailout programs began to ramp up significantly in March, the Fed’s assets totaled a (relatively) modest $918 billion. And 78% of that sum was in risk-free Treasury securities.

Of the current $2 trillion in assets, just $476 billion, or 24%, is in Treasury securities. Nearly $1.3 trillion is in various loans to financial institutions, including foreign central banks (via so-called swap lines). Those loans may be well-collateralized, but you’d have to figure they’re still riskier than Treasuries.

And this week, the Fed began lending directly to U.S. companies by purchasing commercial paper, or short-term IOUs. The Fed bought $145 billion of commercial paper in the first few days of the program.

Note: The Fed’s bailout tab is separate from the $700 billion that Congress authorized the Treasury to spend buying toxic mortgages from banks and investing directly in banks via capital infusions.

It all begins to sound like Monopoly money when the dollar figures get this big, doesn’t it? The risk is that paper currencies could become Monopoly money if governments can’t restore confidence in financial markets and the global economy.

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