Many of you asked about the new $800 billion effort announced by the Federal Reserve last month to help get lending going. Questions like "$800 billion??" and "Where is this money coming from??"

We have answers...

 

Q: This is different from the $700 billion bailout we're always talking about?

Yes, this is an effort by the Federal Reserve.

Q: I read that some of the money would be spent buying mortgage-backed securities. I thought we gave up on that approach?

The Fed will buy up to $500 billion of mortgage-backed securities, but not the dicey ones that have come to be called toxic assets. The Fed will be buying high quality, AAA-type stuff produced by Fannie Mae, Freddie Mac and Ginnie Mae, which are guaranteed by U.S. government.

Q: What's the point?

The idea is to get the market moving again for these securities. Even though they are guaranteed by the U.S. government, investors only seem to feel safe in Treasury bonds right now. So the Fed is acting like a big buyer here to try to prime the pump.

Q: Where does the money come from?

That's a tough one. The Federal Reserve is the central bank for the country, which means it has the strange power to be able to create money. Theoretically, it has an infinite amount of money.

Q: This whole thing sounds strange...

What the Fed is doing here is not totally unusual. One way the Fed controls the amount of money in the economy is by buying and selling Treasury bonds. (For instance, when it buys a Treasury bond from a bank, the bank gets money credited to its account with the Fed, putting more money out there in the world.) In this case, the Fed is going to be buying and selling mortgage-backed securities instead of Treasury bills, but both are backed by the government and should be safe investments.

Q: What is the rest of the $800 billion going for?

The Fed has allocated $500 billion for buying those mortgage-backed securities. Another $100 billion has been allocated for loans to Fannie Mae, Freddie Mac and the Federal Home Loan Banks. (The Fed is buying "direct obligations," meaning bonds issued by these places or short-term debt.) The last $200 billion will be used to try to unfreeze the market for things like student loans, auto loans and credit card debt. (These things, like mortgages, are repackaged and sold to investors. The Fed noted that new issuances of these repacked securities "declined precipitously in September and came to a halt in October." The new program will make allow institutions to use those assets as collateral for loans from the Fed.)

Q: Are we, the taxpayers potentially on the hook for all this?

Yes, but in a kind of weird way, and this will take a full paragraph to explain.

(Deep breath)

The $800 billion the Fed is talking about here does not get approved by Congress. As we mentioned the Fed has a theoretically infinite amount of money since it's a central bank. The Fed is actually a source of revenue for the government. Last year the Fed earned $41 billion, and gave $34 billion of that to the government. (The Fed earns a profit because it gets its initial cash for free, but then lends it to banks or buys securities which pay back with interest. Good deal, huh?) So if the $800 billion effort the Fed is undertaking doesn't go perfectly, then that could reduce the amount the Fed will give to the Treasury, which means the government has less money to spend, which means, yes — some impact on taxpayers.

Some details on the plans here and here.