Who will bail out the Fed?

A number of bloggers have been wondering about the health of the banking system's ultimate backstop, the Federal Reserve. As Barry Ritholtz at the Big Picture and Mike Larson at iStockAnalyst note, the Fed's balance sheet is falling apart, thanks to the acquisition of the same low quality paper that has driven American banks to the brink.

It's been a largely unstated assumption that the Fed has near infinite capacity to absorb toxic mortgage backed securities and corporate bonds, but the growing levels of low quality assets on the Fed's books bring that assumption into question. At some point, those bad assets will have to be dealt with.