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Five Things You Need to Know: Fed Considers Issuing Own Debt

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This move, at its heart, is simply a procedural step which allows one bureaucracy, among many, to gain greater independence.

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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

Fed Considers Issuing Own Debt?

According to a piece in the Wall Street Journal that first trickled out in the wee hours of Wednesday morning, the Federal Reserve is considering taking the unprecedented step of issuing its own debt. Why? Good question. Like so many things spoken after midnight, the "why" is either inscrutable or so obvious that you see it coming before the one who speaks it does. In this case, it's a combination of both.

To be clear, the Federal Reserve is not issuing debt because it needs to raise capital. That is the type of debt issuance most of us are familiar with, and with so much attention being directed recently to the expansion of the Fed's balance sheet, some viewed this as a reason for the debt issuance, which is simply not true. Remember, the Fed can essentially raise capital at will, and this is precisely what it has been doing.

Why?

So why would the Federal Reserve issue debt? Complex banking mechanisms aside - and there are several involved in the Fed directly issuing debt, from maintaining an effective Federal Funds rate near the target rate to draining liquidity from the banking system - the bottom line is that an authorization to issue debt would provide the Fed with more independence from the Treasury Department.

Remember, the Federal Reserve, like any bureaucratic wing of government, is concerned first and foremost with maintaining its power and control. On the one hand, Fed Chairman Ben Bernanke and current Treasury Secretary Henry Paulson have worked nearly shoulder to shoulder on the debt crisis, meeting together, testifying together, presumably coordinating certain policies together. But after January 20, 2009 that will very likely change.

As this debt crisis proceeds and becomes more entrenched, as the job losses pile up even as certain insider corporations and businesses - banking, finance, real estate and auto companies - save top executives and protected jobs by accessing taxpayer money through the conduits set up by the Fed and the Treasury, there may come a point when the Fed decides it needs to have independent mechanisms in place. Issuing debt is one of those mechanisms.

This move, at its heart, is simply a procedural step which allows one bureaucracy, among many, to gain greater independence. That's it.

This Is the End?

Remember back in September when politicians all at once came to their collective moment of vague epiphany that We Need a Bailout now? The problem, we were told, was that without a bailout, something very, very bad would happen; something so bad that no one, not a single politician, could verbalize it.

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