The Federal Reserve building in Washington, D.C.
The Federal Reserve building in Washington, D.C. - 
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KAI RYSSDAL: There are reports today that the Federal Reserve is talking to Congress about plans to start issuing its own debt. Selling bonds to raise cash. That caught our attention, mostly because the Federal Reserve can pretty much create all the money it needs. But, Marketplace's Steve Henn explains, the financial crisis has already tested the Fed's considerable powers and sent it scrambling for more.

STEVE HENN: If you could print your own money, why would you borrow it?

Alan Blinder is the former vice-chair of the Federal Reserve. He says even though the Fed can create its own money, it doesn't always want to.

ALAN BINDER: As you create money you create the potential financial tinder for inflation in the future.

But recently the Fed's created a lot of new cash. As Wall Street imploded, the Federal Reserve became the lender of last resort. It bought short-term corporate debt and propped up companies like AIG and Citibank. The total tab: $1.2 trillion and rising. At first the Fed financed these bailouts by borrowing close to $500 billion from the U.S. Treasury. But in November Treasury cried uncle.

BINDER: There is a legal limit on how much money the Treasury is allowed to borrow -- the national debt ceiling.

And Treasury was about to hit it. Since then the Fed's had to create new money to finance new bailouts. And economist Alan Meltzer says in the long run that's a problem.

ALAN MELTZER: A big one.

How big?

MELTZER: Very. Very.

Because if inflation ignites, the Fed will have to raise interest rates again.

MELTZER: There'll be pressures on them from the Congress not to do it. There'll be pressures on them from the market not to do it. That's not going to be an easy thing to do, and they are not very adept at doing those things.

Which is why he and Blinder believe the Fed's looking to finance any future bailouts without printing more cash.

In Washington I'm Steve Henn for Marketplace.