Daily VideoMarch 18, 2009
Where Does All The Bailout and Stimulus Money Come From?
During the present financial crisis, everyone has heard about the trillions of dollars the federal government is spending to help fix the economy.
In this report, NewsHour economics correspondent Paul Solman explains where all that money actually comes from.
Solman explains how the Federal Reserve and the Department of the Treasury fill different functions in the economic system and how they affect federal policy.
While the Treasury deals with collecting taxes and borrowing money in order to pay for government services, the Federal Reserve acts as a central bank that can actually create money when it is needed.
This report features several economists who explain how the Federal Reserve and Treasury Department work and also discuss issues such as inflation and government bonds
“The Federal Reserve insists, absolutely categorically, ‘We do not print money. That’s the U.S. Mint that prints money.’ But, of course, the Fed issues money. It’s a great deal, right? Instead of having to print it on a printing press, you just do it digitally. It doesn’t actually cost you anything, hardly anything to issue these new digits, these new bits of code on a computer somewhere” – Simon Johnson, MIT
“The Treasury, which collects taxes and, if they fall short of federal expenses, borrows to make up the difference by selling its Treasury bills, notes, and bonds to investors. Usually, the more it borrows, the higher the interest rate it has to pay to keep lenders lending. But investors have been so safety conscious of late, they’ve been willing to take almost no interest at all to stow their dough in Treasuries.” – Paul Solman
“The Fed is clearly pumping huge amounts of money into the financial system to prevent a panic, to provide liquidity for institutions who need it. And there is a danger that, if they pump too much in, the ultimate consequence will be inflation, which they don’t want.” – Robert Samuelson
Warm Up Questions
1. What is a loan? What is an investment?
2. What is the Federal Reserve?
3. What is the Treasury?
1. What is the difference between the Federal Reserve and the Treasury Department?
2. How does the Fed create money? Does this seem strange to you?
3. Why can’t the Treasury just pay for all the bailouts themselves? Why should the government create money it doesn’t have?
4. What is inflation? Can you think of an instance when too much of something made it worth less?
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