Central Banking 101: What the Fed Can do as "Lender of Last Resort"

The Fed’s invisible hand first really became visible with the bailout of AIG. House Speaker Nancy Pelosisaid in June 2009:

"Many of us were, shall we say, if not surprised, taken aback when the Fed had $80 billion to invest -- to put into AIG just out of the blue. All of a sudden we wake up one morning and AIG has received $80 billion from the Fed. . . . So of course we're saying, Where's this money come from? ‘Oh, we have it. And not only that, we have more.’”

How much more -- $800 billion? $8 trillion?

The stage magician smiles coyly and rolls up his sleeves to show that there is nothing in them. “Try $12.3 trillion,” he says.