Andy Busch of BMO Capital Markets is as concerned about the Fed monetizing federal debt as I am:
The actions by Ben Bernanke and the Fed will ensure that a recovery by the economy will not be choked off just as it begins. However, there are dangers to this policy and the monetization that may occur. The discussion of a Bad Bank and the $1-2 trillion funding of this bank is where we need to watch. The current plan being discussed is going to utilize some of the new TARP money and then issue government bonds to fund the rest.
My belief is that the Federal Reserve will be called upon to buy some of this paper and thus monetize debt. Printing money to pay for programs was done with success during WWII. Doing it today is entirely different. There is no war and there are no price controls.Should the Fed actively engage in US government debt monetization they run the risk of dramatically increasing the money supply, driving down the value of the dollar, and forcing interest rates higher which would choke off a recovery.