Where does the Fed gets its money?

Today we learned that the Federal Reserve is going to buy $800 billion of loans from banks (story).  Where is this money coming from?  The Fed is going to have to give banks $800 billion in cash in exchange for the right to collect whatever money gets paid over the years on car loans, student loans, and mortgages.  It sounds like taxpayer cash is going out the door right now, yet there was no corresponding story about Congress raising $800 billion in taxes.  There was no corresponding story about Congress authorizing $800 billion in spending.  We didn’t hear about the U.S. government selling $800 billion in new bonds.

So… where is this money coming from?  Are we printing it, borrowing it, taxing it, or “other”?

15 Comments

  1. Jonathan Birge

    November 26, 2008 @ 12:09 am

    1

    My understanding was that we’re essentially printing it. For all of the hand wringing about the $700B bailout, the feds have put our children on the hook for about $8T without a single vote in congress. I have a feeling that if (a) Americans weren’t so apathetic and (b) ignorant of what is happening, there would be marches in Washington, Greenwich would be burning, and people in Manhattan would be throwing bricks through every piece of tinted glass on Wall Street.

  2. patrick giagnocavo

    November 26, 2008 @ 12:30 am

    2

    Read up on the Fed and you will find it basically “makes it all up” out of thin air. Fiat currency is backed by nothing except the faith that exists in the government that backs it.

  3. Anonymous

    November 26, 2008 @ 1:37 am

    3

    The fed asks private banks to lend $800 billion in exchange for guaranteeing the debt through a future act of congress should it default. The fed is a private company just like Fannie Mae was or Citibank was. It raises money from deposits, charging interest, & charging fees. It can’t print money.

  4. Friedrich

    November 26, 2008 @ 2:06 am

    4

    All of it. You remember the first plan from Paulson, obviously nobody really want to know any longer. What a surprise another nail on the coffin. Who does like to get buried alive?

    In principal there is not limit to the Federal Reserve to money creation. I’m not sure about the government control over the FED….. But it seems they all want the same….

    Politicians

  5. Tim

    November 26, 2008 @ 2:30 am

    5

    I think your question may be more rhetorical than actual but I’m pretty sure we’re just printing it up.

    Chris Martenson actually does a great job in his crash course talking about it.
    (among other depressing things like most people’s complete lack of understanding of exponentials)

    http://www.chrismartenson.com/crashcourse

  6. Vidar Svendsen

    November 26, 2008 @ 4:30 am

  7. Darwin

    November 26, 2008 @ 10:24 am

    7

    97% of USD is not actually printed, so the line “printed out of thin air” that people like to use is actually inaccurate. To answer your question though ( as others have already ) they just hit the enter key.

  8. Stephen van Egmond

    November 26, 2008 @ 1:58 pm

    8

    It was, in essence, printed.

    You can see the new bailout money materializing here, if I understand the meaning of this graph:

    http://research.stlouisfed.org/fred2/series/BASE?cid=124

    Where I come from, printing money = inflation. Nobody seems to have pointed that out yet.

  9. Jonathan Birge

    November 26, 2008 @ 10:07 pm

    9

    Anonymous: I don’t think you understand the fractional reserve system. Not only can the fed pull money out of thin air, so can your bank down the street. Darwin is right that it’s not literally printed, but that’s a technicality. It works out the same. The point is, it’s created out of nothing, and is potentially inflationary.

  10. Walter Mitty

    November 27, 2008 @ 12:03 pm

    10

    It is invented, but not printed. Once invented, the Fed lends it (electronically) to various central banks. These banks treat the borrowed money as if it were real. And it is real, if you consider fiat money real. We all consider it real, until the day comes when we don’t. They in turn lend it out to other people.

    The comments about fractional reserves is only part of the picture about money generated by private banks. Essentially, whenever a credit card company raises a customer’s credit limit, some imaginary money has been invented. consumers spend this money just as they would spend real money. They acquire some consumer debt in the process, unless they have some “real money” to pay off the credit card bill when it comes in.

    Increasing consumer debt is what has been keeping us out of recession for about five years now. If consumer debt stops rising, and consumer income remains low, it amounts to a disaster for projected sales of all businesses: airlines, home builders, retailers, manufacturers, and even importers.

    It’s the drop in projected sales, in turn, that has cause the panic in the stock market.

  11. Dwight

    November 27, 2008 @ 1:46 pm

    11

    Some Quotes from Professor Nouriel Roubini at NYU who predicted this crisis as early as 2006: “And this week, indeed, the Fed, together with the Treasury, started to implement some of the “crazier” policy actions that we discussed last week: a) outright purchases of agency debt and MBS to the tune of a whopping $600 billion; b) another $200 billion of loans to backstop the consumer and small business credit markets (credit cards, auto loans, student loans, small business loans); c) an effective policy of aggressive quantitative easing as the balance sheet of the Fed – already grown from $800 billion to over $2 trillion – will be expanded further as most of the new bailout actions and new programs will be financed via injections of liquidity rather than issuance of public debt.”

    “Desperate times and desperate economic news require desperate policy actions, even more desperate than any “desperate housewife” could dream of. The Treasury will be issuing in the next two years about $2 trillion of additional debt (on top of having to refinance and rollover another $1 trillion of maturing debt) while the Fed/Treasury/FDIC are taking on a massive amount of credit risk via outright bailouts and guarantees (TAF, TSLF, PDCF, ABCPFFFMLM, TALF, TARP, Bear Stears, AIG, Citigroup, TALF and another half a dozen new facilities and programs). These policies – however partially necessary – will eventually leads to much higher real interest rates on the public debt and weaken the US dollar once this tsunami of implicit and explicit public liabilities and monetary debt driven by rising twin fiscal and current account deficits will hit a world where the global supply of savings is shrinking – as most countries moves to fiscal deficits thus reducing global savings – and foreign investors start to ponder the long term sustainability of the US domestic and external liabilities.” Source:http://www.rgemonitor.com/roubini-monitor/254591/desperate_measures_by_desperate_policy_makers_in_desperate_times_the_fed_moves_to_radically_unorthodox_policies_as_economy_is_in_free_fall_and_stag-deflation_deepens

  12. Dwight

    November 27, 2008 @ 2:05 pm

    12

    The Fed pays for the securities by crediting the account of the dealer’s bank (e.g. Citigroup, Goldman Sachs, Morgan Stanley) at the Fed. The bank now has more reserves than it needs, and so it lends them out, pushing down the federal funds rate. This operation results in an expansion of the Fed’s balance sheet and thus the money supply. However, the Fed is not principally targeting the money supply but the short-term interest rate, which ripples out to all borrowers and lenders. To raise interest rates [and shrink the money supply], the Fed sells securities to dealers. Source

  13. Brian

    November 28, 2008 @ 12:29 am

    13

    The Fed may be “printing” money, but the amount of wealth lost+the drastic reduction in the velocity of $$$ = deflation, pretty much regardless of what the Fed does in the short term.

  14. grey heron

    December 11, 2008 @ 1:01 am

    14

    My understanding is that it is effectively created out of “nothing”. Also once into the banking system the banks then only need to retain 10% of the amount on deposit and can then lend out the remaining 90% to another bank and so on. Effectively this ends up creating about 9 times the original amount of debt.
    Also some people argue that the Fed is neither federal nor has any reserves.

  15. wade smith

    January 2, 2009 @ 12:41 am

    15

    Do these actions remind anyone of France (pre-revolution), the Wiemar Republic, Zimbabwe and countless other countries heavy in debt, printing massive amounts of currency to save themselves, but ultimately led to their economic destruction?

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