Jacqueline Thorpe
Financial Post
September 18, 2008
The U. S. Treasury cranked up its printing press yesterday to help the Federal Reserve extend an US$85-billion loan to American International Group Inc., the latest in hundreds and billions of dollars of government assistance that will undoubtedly end up in the lap of U. S. taxpayers.
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But while anxiety is rising over the United States’ ability to foot the gargantuan bill for the credit crisis, analysts say the US$14-trillion U. S. economy should be able to absorb the shock.
The key risk is the threat to inflation posed by the seemingly endless expansion of the government’s balance sheet if several more financial institutions go belly up.
“Clearly this will widen the deficit by quite a bit,” Nariman Behravesh, chief economist of Global Insight, said at a presentation in Toronto yesterday.
“But let’s be honest, the U. S. is a very, very rich country.”
The U. S. Treasury swung into action yesterday, selling US$40-billion of cash-management bills to transfer to help cover the Fed’s loan to AIG.
The borrowing is separate from the Treasury’s ongoing borrowing program and marks a departure from the Fed’s strategy thus far of taking private debt in exchange for treasuries. John Chambers, chairman of Standard & Poor’s sovereign ratings committee, said the rescue weakened the fiscal profile of the United States and put pressure on its AAA credit rating.
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