Shiloh – FED is really a very mysterious creature. Being the source of all “paper money” it is a very special entity different and distinct from government. Think of it as a “god” of paper money. It has to practice absolute scrupulousness in maintaining the value of paper money – so that people don’t lose confidence in it. That is a very tricky juggling act between economic growth and inflation.
It does not function according to U.S. Constitution – like rest of the governments. {There is no mention of FED in the Constitution!} War, hurricane are government expenses paid by US Treasury. No one knows what the phrase “mortgage debt bail out” means so far. In a worst case scenario – this has to be Great Depression like crisis – FED may buy some weak Mortgage backed securities to forestall a financial meltdown. That is what people refer to as “Helicopter Ben” dropping money. Basically FED loans out money (with no assurance of getting it back) for weak securities to keep the “pump primed”.
But, the FED can play a tricky game of tilting the balance a little by changing interest rates. That shifts the balance between savings and consumption. Higher interest rate rewards savers and hurts consumers that hurts producers causing lower employment. Lower interest rate hurts savers and rewards consumption – hence increases production – increasing employment.
