And the stability plan bill goes to...

The Federal Reserve Building in Washington, D.C.

TEXT OF STORY

KAI RYSSDAL: The program to revive the banking industry had less than $350 billion left in it when Tim Geithner walked up to the podium today. Then, without even blinking, the Treasury secretary outlined $1.5 trillion or maybe $2 trillion worth of new spending to stabilize the financial system. So, where's the new cash coming from? As he said, Geithner's clearly hoping to get private investors to cough up hundreds of billions of dollars to buy up troubled assets.

But Marketplace's Steve Henn reports, up to $1 trillion more will come from the Federal Reserve.


STEVE HENN: So where will the Fed get more than a trillion dollars to pay for its piece of the bailout?

JAMES HAMILTON: There are basically two options.

James Hamilton is an economist who follows the Fed closely.

HAMILTON: One is to have the Treasury borrow the money and keep it in an account for the Fed to use.

Or the Fed could get the money from commercial banks. Right now banks have nearly $650 billion stashed at the Federal Reserve that they're afraid to lend.

HAMILTON: Right, as long as the banks sit on those reserves the Fed can use those funds without any repercussions.

But if banks decide to do something else with all that money, the Fed will need to cover the shortfall quickly. It could just print money, but Catherine Mann at Brandeis says that would create new set of problems.

CATHERINE BRAND: And, ultimately, that is inflationary.

Mann says inflation is a long way off, but she agrees with Hamilton that taxpayers and the general public are the ones on the hook. And that make Hamilton a bit queasy.

HAMILTON: I don't like these kinds of huge commitments on the taxpayers being made in kind of secretive backroom deals. I don't think that's healthy for our system.

Beverly Lumpkin with the Project on Government Oversight says that's just the trouble.

Beverly Lumpkin: The Fed is just about the most opaque organization in Washington, D.C.

If the federal government is going to spend more than a trillion dollars to prop up the financial system, Hamilton says Congress should have to vote to appropriate the money.

In Washington, I'm Steve Henn for Marketplace.

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About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

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