FROM BEAR CHAT

The Fed cannot monetize government debt.smokey
NEW 11/1/2008 9:42:47 AM

Smokey posted the exact opposite assertion two days ago sighting a quote from Ben Bernanke in his 2002 speech wherein he stated that in order to inflate the economy out of deflation the Fed could control the price of longer dated treasuries by purchasing them from the Treasury.

However upon further investigation he has learned that the Fed no longer has the authority to purchase treasuries directly from the Treasury outside of replacement of maturing securities.During World War II the Fed did purchase treasury bills directly from the government in order to mainain low rates during the war.

But as this Wikipedia insertion indicates, they were relieved of this responsibility in the 1951 Accord."The 1951 Accord, also known simply as the Accord, was an agreement between the U.S. Department of the Treasury and the Federal Reserve that restored independence to the Fed.During World War II, the Fed pledged to keep the interest rate on Treasury bills fixed at 0.375 percent.
It continued to support government borrowing after the war ended, despite the fact that the Consumer Price Index rose 14% in 1947 and 8% in 1948, and the economy was in recession. President Harry S. Truman in 1948 replaced then Chairman of the Federal Reserve Marriner Eccles with Thomas B. McCabe for opposing this policy, although Eccles's term on the board would continue for three more years.
The reluctance of the Fed to continue monetizing the deficit became so great that in 1951, President Truman invited the entire Federal Open Market Committee to the White House to resolve their differences. William McChesney Martin, then Assistant Secretary of the Treasury, was the principal mediator. Three weeks later, he was named Chairman of the Fed, replacing Eccles." LINK

Additionally, as this Fed bulletin of 1997 specifies, the Fed currently has no authority to lend directly to the Treasury."Outright OperationsThe Desk may not add to the Federal Reserve's holdings ofsecurities by purchasing new securities when they are firstauctioned because it has no authority to lend directly to the Treasury.(1) Therefore, it must make any additions to holdings through purchases from primary dealers in the secondary market or directly from foreign official and internationalinstitutions.(1) It may exchange its maturing holdings for new securities at auction,however, and it does so routinely."

http://www.federalreserve.gov/pubs/bulletin/1997/199711lead.pdf This does not preclude a new agreement between the Fed and the Treasury to purchase government debt but it does verify what MrMoto and others have been indicating for some time. Outside of replacement of maturing securities, the Fed has no authority to directly monetize government debt.0.