Photo: KRISnFRED, Creative Commons, Flickr
I have the following response to a reader question:

Where does the $700 Billion that the government is spending to rescue financial institutions come from? Is it printed and will it cause inflation?
The bailout money is sort of printed. The money is created by the Federal Reserve/Treasury and lent to the institutions needing a rescue. The Fed/Treasury gets back IOUs from the institutions. The collateral for these IOUs is everything the institution has. Repaying the Fed comes ahead of all other debt holders. Senior debt holders even come behind the Fed so it is very unlikely the U.S. government will lose any money on these bailouts. And since the government charges interest (and gets equity in AIG) they (we the taxpayer) might even make a little money, as happened with the Chrysler bailout. (The bailout in 1979 paid back in 1983 netted the U.S Treasury $350 million.)

Disclosure: I am a United States Taxpayer. I do not own AIG but I have traded AIG in the past two years both long and short. I was a Managing Director and shareholder of the only major institution not to get a bailout (Lehman Brothers). I do not own a Chrysler but five years ago I owned a 1990 Jeep (made by Chrysler) that, because of wear and tear, smelled like a wet dog most of the time.

Photo: mrjorgen, Creative Commons, Flickr