Amid news that the Federal Reserve is establishing this multi-billion dollar line of credit, extended that many billion in overnight repurchase agreements, contributed $30 billion to the J.P. Morgan buyout of Bear Stearns and spending $83 billion for the purchase of A.I.G., the question lingering in the back of my mind is how is the balance sheet of the Federal Reserve looking right about now. The Federal Reserve doesn’t have unlimited resources at it’s disposal. It has about $800 billion in assets which only buys it a limited amount of credibility. It’s not all that much relative to the scale of modern financial flows.

Anyway, wonder and The Wall Street Journal will deliver (Blackstone, Brian, “U.S. Moves to Bolster Fed Balance Sheet,” 18 September 2008, p. A3 [subscription required]):

The Treasury, responding to worries that the Federal Reserve could be running out of financial ammunition to deal with the credit crisis, moved to reload the Fed’s gun with $100 billion worth of bullets.

The central bank’s bailouts of Bear Stearns and American International Group Inc., as well as lending programs created in the past year, are putting the Fed’s once-mighty balance sheet at risk. Financial markets have begun to fear that if nothing is done, the Fed might have trouble putting out fires in the future.

The Fed held close to $800 billion in Treasury securities a year ago. By last week, that had dwindled to just under $480 billion. The amount drops to less than $200 billion if the $200 billion pledged to the Term Securities Lending Facility — a Fed lending program created in March for investment banks — and the full $85 billion line to AIG are accounted for, Fed watchers say.

“The tally is so low that it is becoming imperative for the Fed to take actions to enlarge its balance sheet,” said Tony Crescenzi, a strategist at Miller Tabak in New York.

When the Fed lends money to a financial institution, it usually sells an asset such as Treasurys separately in the market and absorbs the cash created by the loan. The goal is to keep a proper level of money flowing through the financial system. If the Fed were to run too low on Treasurys to conduct these operations, it could lose its ability to drain money from the banking system and control inflation.

On Wednesday, the Treasury announced a temporary program to bolster the Fed’s balance sheet and sold $40 billion in 35-day Treasury bills. It announced later in the day that it would hold two additional auctions of Treasury bills on Thursday totaling $60 billion. In effect, Treasury is auctioning off more securities than are needed to fund the federal government, and carrying out the draining function in place of the Fed. The cash from the Treasury’s sales is parked at the Fed.

Of course the government has infinite money, but it comes at a cost. As long as the Fed coffers are topped off, Chairman Bernanke is his own man. But already Federal Reserve assets are approaching levels where he will increasingly be at the behest of Treasury Secretary Paulson and House Financial Services Committee Chairman Barney Frank.