somemore, in the current crisis, FED has widen its balance sheet by absorbing and exchanging a lot of "bad asset" by the original "good asset", so it has potential downsides to writedown, hence need more money. on the other hands, FED also guarantee many banking transactions, which also impose the potential issues...however, all the downsides above will impact FED materially only if the markets deteriorate much further, like say more bankcrupcies, more frault fallout and failures...in that case, FED will print money, which will essentially inflate the market, which will depreciate USD in long term, probably years later.
even worse, which never happend before i guess, is that Bernake ever had theory solving deflation problem, which the world is terribly worried about. the answer from Ben is that "print money, and get on to helicopter, and throw out the money". in this way, the purpose is to create inflation, which will likely to drive consumption. this will potentially work out in short term, and if still not, then NO ONE HAS ANSWER SO FAR, as i know.
but u know what, things are not all in FED control or their responsibility. US Treasury in fact is to do more things: at least bailing out corperates, boost fiscal spending.....which in fact has more powerful impact to economy. thus FED has to work closely with Treasury to get the way out.
so has this anything to do with inflation? tentatively not so, as Treasury is able to raise money, as u see, how crazily ppl in the world has flying into treasury....also this is witnessed by increditable strong USD this half year!
looking forward, we could not rule out the possibility of printing money if things get worse and worse, like great depression. however, u know what, world still has money, alot! but no one wanna step into capital markets. and if US print money, ppl in the world get threaten, as ON ONE wanna see a week US consumptions, which means all the exporters will be dooms...
the world are tied together! if US plan to print money to save themselves, they would inform the world first. and then the world will fear, then they agree to buy Treasury...u see how effective of Paulson's visit to various countries last few months...
lastly, US down => raise more debt to start again => if fail, then print money => USD devalue => world consumption down to ground => exporters cut throats, USD in hand worth less, Oil get back to $10, which essentially make oil drillers run huge loss....=> world go to depression => more roits, strikes, political fightouts.....ok, u number them!
