U.S. taps piggy bank, borrows to aid market

updated 8:48 p.m. ET Sept. 17, 2008

WASHINGTON - Where does Uncle Sam come up with huge sums of money during a financial emergency? Like the rest of us, the government taps its reserves and borrows if it needs more.

The federal government has pledged eye-popping amounts — more than $600 billion in the past year — to bail out, or help bail out, some of the biggest names in American finance. The latest was American International Group Inc.

Now the credit crisis is starting to tax even the Federal Reserve's deep resources.

On Wednesday, the central bank took the unprecedented step of asking the Treasury Department to sell debt on behalf of the Fed. The first of those auctions raised $40 billion, and two more to raise an additional $60 billion are scheduled for Thursday.

Analysts said these auctions don't mean that the Fed, the bank that backs up the U.S. banking system, is strapped for money. Instead, they said it represented an effort to better manage its own holdings of Treasury securities.

It uses those securities to control interest rates by buying or selling the securities to banks, thus raising and lowering the amount of money banks have to loan out and influencing the price of that money.

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While the Fed has access to its fat piggy bank to support its effort to prop up financial companies, the Treasury Department will have to whip out the credit card for the support it is pledging to mortgage finance companies Fannie Mae and Freddie Mac.

Treasury will have to borrow the money because it doesn't have the deep reserves that the Fed does. The country is running a huge budget deficit this year and is projected to run an even bigger one next year.

Those deficits will present a major challenge for the next president. Both Republican John McCain and Democrat Barack Obama have a list of their own spending priorities that they want to enact, not to mention their promises to provide tax cuts.

The Tax Policy Center, a nonpartisan think tank, estimates those will cost $4.2 trillion over the next decade in the case of McCain and $2.9 trillion in the case of Obama.

Those campaign promises, on top of all that the current administration has done to contain the current fiscal crisis, could really put a strain on the government's balance sheet.

Ten days ago, the government took control of Fannie and Freddie, pledging to provide up to $200 billion to cover losses at the two companies.

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