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Michael Rozeff on LewRockwell.com has a good article...
Now we must consider another feature of this scenario, which, unlike the one discussed above, is inflationary. Suppose that the Fed issues bonds and manages to sterilize bank reserves. It then decides that it has more room to expand its balance sheet even further! It goes through another round of vastly increasing bank reserves while buying up troubled securities. The currency depreciation possibility mounts up still further! The Fed then requires another round of bond issuance. And if the Fed, for political reasons, buys up mortgages from Fannie and Freddie and overpays for them as it expands its balance sheet, then this causes a direct depreciation of the currency (the dollar).
The Fed then, while still a central bank, becomes also a troubled-loan mutual fund. It becomes a kind of junk bond fund. The value of the currency and of the bonds it issues will move up and down with the value of the loans that it holds. Since the bonds have priority as to interest payments, the currency becomes a junior and levered paper that has much greater risk than at present. The country’s currency becomes even more unstable than at present.
Now we must consider another feature of this scenario, which, unlike the one discussed above, is inflationary. Suppose that the Fed issues bonds and manages to sterilize bank reserves. It then decides that it has more room to expand its balance sheet even further! It goes through another round of vastly increasing bank reserves while buying up troubled securities. The currency depreciation possibility mounts up still further! The Fed then requires another round of bond issuance. And if the Fed, for political reasons, buys up mortgages from Fannie and Freddie and overpays for them as it expands its balance sheet, then this causes a direct depreciation of the currency (the dollar).
The Fed then, while still a central bank, becomes also a troubled-loan mutual fund. It becomes a kind of junk bond fund. The value of the currency and of the bonds it issues will move up and down with the value of the loans that it holds. Since the bonds have priority as to interest payments, the currency becomes a junior and levered paper that has much greater risk than at present. The country’s currency becomes even more unstable than at present.