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Fallout: The Financial Crisis

Where’s this bailout cash coming from?

Steve Henn Oct 15, 2008
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Fallout: The Financial Crisis

Where’s this bailout cash coming from?

Steve Henn Oct 15, 2008
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TEXT OF STORY

Kai Ryssdal: With government bailouts come some really big numbers: $700 billion for the original Paulson plan, plus another $130 billion Congress tacked on. Two hundred billion for Fannie Mae and Freddie Mac; more than $100 billion for AIG. On top of that the Federal Reserve’s about to start lending directly to companies and, as we told you yesterday, it’s given foreign central banks unlimited lines of credit.

As we start making the shift from covering the bailout to tracking the fallout from it, we asked Marketplace’s Steve Henn to add up all those line items and explain where the money’s going to come from.


Steve Henn: OK, here’s the first thing you need to know about the Fed: It owns the printing press, so it can magically make money. [printing press sound] But there are down sides to revving up that big green machine in the Fed’s basement. Remember the Weimar Republic? [tape of “Wilkommen” from the musical “Cabaret”] OK, I don’t know either, but back then the Germans tried printing money to bail out their economy. They got hyperinflation. The Fed wants to avoid that. So, if the Fed’s not printing money, where is all this cash coming from?

Ken Kuttner: It’s basically borrowing from the Treasury.

Ken Kuttner is a professor of economics at Williams College. He says the Fed started this crisis with an $800 billion war chest. Since then, the Fed’s been busy lending money at low rates, bailing out a few huge banks and trading T-bills for hundreds of billions of dollars in mortgage-backed securities. Now that war chest is almost wiped out. So last month without hardly any public debate, the Treasury began issuing new debt and giving the cash to the Federal Reserve.

Since then, the Treasury has forked over half a trillion dollars. That’s not bailout cash, that’s half a trillion you haven’t heard about before. The Fed’s used this cash to make new loans. As collateral for those loans, Kuttner says, the Fed’s accepted a lot of questionable assets.

Kuttner: Nobody really knows exactly how big the risks are.

But one thing’s for sure, if the Fed doesn’t get paid back, the Fed can’t pay the Treasury back and U.S. taxpayers will end up on the hook. Or I suppose the Fed could just start printing money. [Tape of “Money” from the musical “Cabaret”]

In Washington, I’m Steve Henn for Marketplace.

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