Federal Reserve Contemplating Doubling the Size of Its Balance Sheet

to a whopping $5 trillion.

UK Telegraph's Ambrose Evans-Pritchard reports:

"Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

"Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

""We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

"Mr Bernanke is so worried about the chemistry of the Fed's voting body – the Federal Open Market Committee (FOMC) – that he has persuaded vice-chairman Don Kohn to delay retirement until Janet Yellen has been confirmed by the Senate to take over his post. Mr Kohn has been a key architect of the Fed's emergency policies. He was due to step down this week after 40 years at the institution, depriving Mr Bernanke of a formidable ally in policy circles." [Emphasis is mine. The article continues.]

In other words, the Fed chairman is scared sh-tless.

5 Members of the Federal Reserve Board are:

• Ben Bernanke
• Donald Kohn
• Kevin Warsh
• Elizabeth Duke
• Daniel Tarullo

Of them, Kevin Warsh, former Morgan Stanley banker and former member of the Plunge Protection team (aka Working Group on Financial Markets), has expressed views almost identical to the critics in the Fed against Bernanke's policies. (For more on Mr. Warsh's views, read my posts.)

Bernanke's critics in the Fed are:

• Kansas Fed chief Thomas Hoenig
• Philadelphia chief Charles Plosser says
• Richmond chief Jeffrey Lacker

The most vocal critic, Thomas Hoenig, is the only member among these critics in the FOMC. (Plosser is an alternate member for 2010.) Hoenig was strongly in favor of the regulation on financial derivatives, the position diametrically opposed to that of the Federal Reserve Board and the Treasury Department. He also wants to bring back Glass-Steagall-like law.

Bernanke's idea of more than doubling the balance sheet is not his original, by the way. He must have surely channeled from the Vampire Squid's economist, who said, back in August last year, the Fed could easily double the balance sheet to $4 trillion with no adverse effect. At that time, the Fed's balance sheet was closer to $2 trillion than to $2.5 trillion.

Unlike the last time, this time he would probably have to forgo the sterilization if he really wants to avoid recession (so-called 'double-dip', although many 'small people' didn't even feel the uptick). He would have to flood Main Street with money.

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