Where did all the bailout money go?

It's enough to boggle the mind. If all goes well, it'll be enough to help the economy recover.

The US government has deployed more than $3 trillion in an all-out effort to resolve a financial crisis and end a recession. It is acting as lender of last resort, investor of last resort, and consumer of last resort.

After more than a year of extraordinary federal interventions in markets and private companies, much still hangs in the balance.

At best, the federal efforts could stabilize the banking system, ease a record foreclosure wave, and kick-start an economic recovery. Then the Federal Reserve and Treasury would withdraw their stimulus before it sparks inflation or a run on the dollar by foreign investors.

At worst, the rescue could fizzle. While putting out a fire for a season, it could leave key banks still weak and the economy stalled, all while piling up a dangerous level of federal debt that limits options for the future.

Or the result could be something between those extremes. However it all turns out, the government strategy in some ways echoes the very banking behaviors that helped to launch the crisis: expanding its own leverage (debt) to extend high-risk credit to others.

Here's a guide to the rescue programs, in questions and answers.

What's the recovery effort costing?

A lot, but economists can only guess what the final tab will be. The federal government has allocated more than $11 trillion to fight the recession and financial crisis – an amount that approaches one year's output of goods and services in America. But much of that money is the potential size of rescue programs, not their actual scale (now about $3 trillion).

The amount of money used, moreover, may not be the true cost. Some very large programs may never cost taxpayers a dime. For example, the Federal Reserve stands ready to make as much as $1.8 trillion worth of 90-day loans to corporations – by buying their so-called commercial paper. It's the largest single rescue program, launched when private-sector funding markets froze in a panic last fall. But the money is going out only to firms with high credit ratings and it gets repaid within three months.

Many US interventions amount to lending, investing, or insuring, not direct spending. Hence, the cost to taxpayers will depend on how the economy fares, which will affect how many loans or investments fail to pay off. At a minimum, though, nearly $1 trillion already has been committed in direct spending – the Bush and Obama stimulus plans.

Where's the money coming from?

It comes from two main sources. The first is the Federal Reserve, which can expand its balance sheet (that means "spend" to you and me) at will. The goal is what Fed Chairman Ben Bernanke calls "credit easing" – to ensure a normal flow of credit at a time when many institutions and investors are reluctant to lend. But when the Fed expands its asset base by making loans, a side effect is to expand the money supply in the economy. That can lead to inflation, but so far it's just offset part of the contraction in private-sector financial activity.

The second is taxpayers. It's not that income-tax rates have gone up lately, but Americans are on the hook in the long run. The spending adds to US debt. This also means, by the way, that the rescue's ultimate cost depends on future changes in the government's borrowing costs.

For now, the Treasury can issue bonds at very low interest. But those debts will probably roll over into new T-bonds a few years from now, quite possibly at higher interest rates.

Why is this big bailout happening?

Without intervention, the recession would be much worse, say policymakers. The causes are many, but the deflation of an overheated housing market triggered a chain of problems. Investors, who had financed a great deal of lending by buying credit products, retrenched. The health of banks deteriorated. The stock market fell. All this rippled out to affect consumer confidence and business prospects.

Now the goal is to keep job losses to a minimum and to prevent a lack of credit from choking the hoped-for recovery.

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