ROBERT SIEGEL, host:
Before Ben Bernanke took over the Fed, before this financial crisis, the Central Bank did many things and owning home mortgages was not one of them. But these days your mortgage check might go to the Fed. This week, the Federal Reserve bank of New York opened its doors to our Planet Money team.
Chana Jaffe-Walt and David Kestenbaum take us there.
CHANA JAFFE-WALT: November 2008, the heart of the financial crisis, a bunch of central bankers sat around a table and wondered: How do we keep this from becoming the next Great Depression?
They've done what they normally do, cut the main interest rate, cut it almost to zero. But the housing market was still tanking. They wanted it to stop.
DAVID KESTENBAUM: Their solution? Throw money at it. For the first time ever, the Fed announced it would buy mortgages mortgage bonds.
JAFFE-WALT: It was such a big announcement, it's easy to forget, oh, someone, some person actually had to go do it. They had to find someone to spend all the money.
Ms. JULIE REMACHE: I was actually at my desk at my job and my cell phone rang, so I took the call in the conference room.
KESTENBAUM: One of those people was Julie Remache - long red hair, she moves her hands a lot when she talks. She had left the Fed to work in the private sector, but now they needed her back.
KESTENBAUM: Did you recognize the Fed extension?
Ms. REMACHE: I did.
(Soundbite of laughter)
Ms. REMACHE: I did know it was somebody calling from the Fed.
KESTENBAUM: Did you wonder maybe?
Ms. REMACHE: I was imagining what it would be like to be back, you know, even before I got that call. So for somebody who had spent so much time here to, you know, when I got that call, how could I say no?
JAFFE-WALT: The guy at the other end of the phone was Richard Dzina, senior vice president at the Fed. And the offer was basically this: You'll be part of a small team. Your job, should you choose to accept it, is to spend hundreds of billions of dollars.
Mr. RICHARD DZINA (Senior Vice President, Federal Reserve): We had to, you know, come up with a plan of attack within a six-week window.
JAFFE-WALT: You wish it was six months.
Mr. DZINA: We wish it was six months, but it was actually just six weeks.
KESTENBAUM: The Federal Reserve had never actually purchased home mortgages before ever.
Mr. DZINA: No. No.
Mr. DAVID WUERFFEL: So this is the mortgage-backed security purchase program team room. It's a smallish room. There's only it's not as big as you might think when you consider the size of the overall purchase program.
JAFFE-WALT: We got a tour of the room where it all happens with Julie and her colleague Nathan Wuerffel. Apparently we're the first reporters who have been let in here.
KESTENBAUM: The floor is not marble. There are no oak tables.
JAFFE-WALT: It does not look space-aged.
KESTENBAUM: It looks like four small cubicles with a Nerf football net and a table tennis trophy.
Ms. REMACHE: Somebody sits on a yoga ball.
Mr. WUERFFEL: Right. Yeah. Occasionally.
JAFFE-WALT: Julia and Nate both told us they took this job very seriously. The Fed bought bonds containing safe mortgages all backed by the government.
KESTENBAUM: But still, they bought so much. In the end, one and a quarter trillion dollars worth. That's a fifth of all the government-backed mortgages out there.
JAFFE-WALT: And that one and a quarter trillion dollars before that moment did not exist.
KESTENBAUM: Can I ask a kind of weird question, but I know it's one everyone's going to ask? Where does the money come from?
Mr. WUERFFEL: It's created, right? So that's the nature of central banking, right? So, central banks, when we actually purchase a security, we pay for it with cash that is basically created by the Central Bank. That's the nature of central banking around the world.
JAFFE-WALT: That is the weird superpower of a central bank. Richard Dzina says at the Fed they can say, I'd like to buy this bond, and the bank will say, okay. And then in that bank's account with the Fed, the Fed just changes the numbers in there.
Mr. DZINA: And viola, money is created.
KESTENBAUM: Basically you press a button and in their account it says we have this much more money and they figure you're good for it.
Mr. DZINA: Yes.
KESTENBAUM: Does that seem weird to you at all, after all these years?
Mr. DZINA: Yes, it is still a magical process.
KESTENBAUM: So, over 15 months they worked this magic. A small group of people here pressed keys, created one and a quarter trillion dollars out of thin air and used it to buy mortgage bonds.
Mr. WUERFFEL: So we purchased 1.25 trillion.
Mr. WUERFFEL: I think we fell short by, like...
Mr. DZINA: 61 cents short something...
Mr. WUERFFEL: Pennies.
Mr. DZINA: 61 cents.
Mr. DZINA: Seriously.
JAFFE-WALT: No way. 1.25 trillion you got within how much?
Mr. DZINA: We got very, very close to the actual 1.25 trillion. I do think we were within pennies of the final charge.
JAFFE-WALT: Did you guys ever think, when you were buying, about the houses that were in the stuff that you were buying?
Mr. DZINA: I don't think I've ever thought about the specific houses, no.
KESTENBAUM: It's possible you were buying your mom's house the mortgage on your mom's house or something.
Mr. DZINA: It's possible. I was buying the mortgage on my own house, so, yeah, I mean, it's very possible.
KESTENBAUM: The Fed sees the program as a success. By buying those bonds, they help provide money for people taking out mortgages, help lower interest rates, maybe help slow the fall of housing prices.
JAFFE-WALT: This seems sort of crazy that you can create money, use it to help the economy with no cost.
KESTENBAUM: Well, it's possible there will be a cost. Some people worry about inflation. After all, there is now one and a quarter trillion more dollars out there than there used to be.
JAFFE-WALT: But the more striking possibility, it's possible there's not much cost at all. That an institution can create one and a quarter trillion dollars out of thin air, hurl it into the economy and we all get away with it.
I'm Chana Jaffe-Walt.
KESTENBAUM: I'm David Kestenbaum, NPR News.