Fed considers issuing debt of its own
Even though the Federal Reserve can print pretty much all the cash it needs, it's now considering borrowing money by selling bonds. Steve Henn reports.
The Federal Reserve building in Washington, D.C. (Chip Somodevilla/Getty Images)
More on Fed. Budget/Govt. Spending, America's Financial Crisis
TEXT OF STORY
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.
Comments
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From Fremont, CA, 12/11/2008
It's about time we started to find creative ways to raise money to pay for our spending.
How are we supposed to set an example and tell folks to save, when all government does is spend?
Need money? Just print it! What a joke.
It's about time we ALL started living within our means. Unfortunately that means we'll have to struggle to live below our means just to catch up.
Can it be done?
From Clearwater, FL, 12/11/2008
That will really be a big problem, won't it? Of course it won't want to print more money because what value would that put on the dollar? The inflation will just be disastrous. We just hope the recession will be short enough although I'm not holding my breath.
Evelyn Guzman
http://www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)
From St. Louis, MO, 12/10/2008
I heard the segment, "Fed considers issuing debt of its own" while driving home from work. Being primarily focused on traffic, I heard the segment to say that the Fed was printing money for its own use independent and apart from any money it carries "on account"-- rather like a banana republic. However, the details in the trancript would indicate that this is not the claim of Mssrs Binder, Meltzer, Henn and Ryssdal. That's understandable because certainly they know better. I hope that my misunderstanding of the segment was the result of my lack of attention and not the result of any attempt to mislead on the part of the program staff.
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