Can an economist or banker please explain....

[oldcrock]

When we hear that the Fed has saved AIG in an $85m rescue package, or that governments around the world are pumping billions + into the money markets to shore them up, where does this money come from? Is this basically taxpayers' funds? Is this money in the coffers or is it being borrowed from somewhere? And if so, what effect does it have on the economy - surely creating money to inject into the economy causes inflation? And borrowing it increases the government's current account deficit?

Is this overall any better than allowing banks and other enterprises to fail? I understand that there must be confidence in the banking sector but at what price??

Please can someone patient explain!

[OMaLittle]

I think that in both of these cases the Fed/central banks is/are lending the money - it's a debt transaction not an equity transaction. In effective nationalisations/conservatorships (Northern Rock/Fannie Mae and Freddie Mac) it is an equity transaction and the organisation becomes the property of the government (though in both cases the 'property' probably has a negative net asset value!)

In the cases of liquidity injections, yes - it is taxpayers' money, but it is LENT, so it remains an asset. The loan to AIG is probably higher risk than the money market loans as these tend to be shorter duration.

[MrsSprat]

Coffers and proceeds from sales of government bonds (which are a less risky investment in turbulent times, so that's where some of the liquidity in the market has been attracted anyway).

Neither an economist nor banker, so will stop there.

[oldcrock]

Thank you - I think this makes sense...!

[Upwind]

Does this mean that we get the £50 billion spent on Northern Rock back then

[OMaLittle]

Yes.

On the same day I am hoping myself and the DDs might bear witness to an extraordinary bacon migration (Tesco value streaky, naturally).