The Fed's mammoth bailout of financial firms is unprecedented in the history of the central bank, which now must play new and contradictory roles, the New York Times reports. The Fed has often been called the nation's lender of last resort—but the acquisition of AIG and holding of Bear Stears securities now also make it the investor of last resort.
The Fed has morphed from a regulator of monetary policy into an insurer, an investment bank—and with AIG's holdings, a hedge-fund manager. Attempting to both minimize risk to the taxpayer and stabilize the financial system is certain to cause tension. The Fed's recent activity has severely stretched the balance sheet—even for a body that can print its own money. This week's sale of $100 billion in special Treasury bills is expected to be followed by more.