The Federal Reserve injected an additional $2 billion into the banking system

[Maggie_May]

NEW YORK (CNNMoney.com) -- The Federal Reserve injected an additional $2 billion into the banking system Monday, marking the second time in as many sessions that the central bank has taken steps to help sooth jittery financial markets.
http://money.cnn.com/2007/08/13/markets/fed_markets/index.htm?postversion=2007081312

Can anyone tell me how this works? I just don't get it.

[HeraldSquare212]

1. I was going to ask you

What does 'inject money' mean? It's available to be borrowed whereas it wasn't before? How can that matter if the interest rate doesn't change - supply is up but cost stays the same?

[Maggie_May]

3. So this is borrowed money?

How is this paid back? Who is it paid back to? Sorry for questions but I am really try to understand this.

[TechBear_Seattle]

4. Pretty much right in one

The United States (and most other countries) has what is called "fiat money," ie it is valuable because the government says it is valuable. Part of that value comes from it being scarce; at any given moment, there is a limited (although large) number of dollars in circulation. What the Fed has done is increase that limit.

The downside -- and it is a very serious downside -- is that most of the value of the dollar comes from the perceived strength of the US economy. That has not changed; the pie, instead of being cut into 300 billion slices, is now cut into 302 billion slices. In other words, there are more dollars but each one is worth slightly less than it was before. This is actually a temporary devaluation of the US currency; eventually (it is hoped) the extra money will be withdrawn from circulation which will (assuming our economy does not keep slipping) restore the value of the dollar.

[mainegreen]

2. They invent money, give it to the banks who then loan it out. Now --your-- money is worth less.

Easy.

[JimRob is a Douche]

5. Just as you'd expect it to work...

...an additional blast of hard cash- except the fact that it comes from the Fed and therefore worthy of increasing a panic (which goes unnoticed by the media)- increases circulation of dollars and makes the reserves held by the credit market worth less. Then they're more likely to release their own held reserves into circulation, since they'll "lose" money if it's held on to.

This is particularly why I like the Federal Reserve, and why people like Ron Paul need to stop screamin about how the Fed needs to go.

The Fed insures that we'll never have another stock market fall like in 1929!

[HeraldSquare212]

6. Tech bubble

I always wondered if one of the causes of the tech bubble was the extra money put into the economy due to fears re: Y2K.

[karynnj]

7. It couldn't have been because of the timing

The tech bubble ended in 2000 after existing for many years in the 1990s. It was a pretty class case of speculation ignoring underlying value. People seeing that a stock had had incredibly good period over period growth bought the stock expecting the price to continue on the path it was on. At some point these stocks were grossly over valued. This worked until many imploded.

[soothsayer]

8. more hidden inflation. no one knows how many dollars are in circulation now.

Well, someone does, but they're not telling... We no longer report on the M3 money supply (as of last year). A great way to hide inflation. Bernanke said he'd throw money out of helicopters to 'save' the economy. Looks like he's making good on that promise.