The easy answer would be they print more! Without getting into all of the implications of just printing money (as the Fed wouldn't actually do that) what most don't realize is that the Fed actually does have a finite amount of money to lend.
Once the balance sheet is cleared, they must petition congress for the ability to sell more Treasury Bills in order to keep themselves liquid.
This is precisely where the Federal Reserve is headed. And this is also precisely right up "bail out alley".
Consider the following from SafeHaven.com:
"Whoever believes that the most recent Fed/JP Morgan heist to acquire Bear Stearns, along with other simultaneous and preceding Fed actions, were "successful" had better check again.
The current crisis is so severe, and it has already forced the Fed to reach into its own balance sheet grab-bag so deeply, that a very legitimate question arises, and the question is this: when the Fed ploughs all the way through its own balance sheet and gets to the bottom of the barrel, who will bail it out?
Before boring you to tears with the gory details, I can give you the answer right now:
And so will I, and every other American. Isn't that nice of us?...
So, how will you bail out the Fed, then?
(I wish I had published this article earlier, because I have been playing around with a draft for over a week now. Had I done so, could have bragged about my "prescience." However, when it comes to the Fed and other corrupt power centers in today's world (or that of ant day and age), all you have to do is assume the worst case scenario, and you'll be pretty much on target.)
The point: You will bail out the Fed because, once the Fed burns through its balance sheet of US treasuries with its current Term Securities Lending Facility (TSLF), it can only get more treasuries onto its balance sheet by having Congress allow the Treasury to borrow more money from the Fed than the Treasury really needs."
A stunning revelation, but one that smacks of truth. Consider this Wall Street Journal article, which says:
"WASHINGTON -- The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.
Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed's name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011."
Let's consider that for a moment.... ok, moment's gone. Having the treasury borrow more money that it needs is clearly a scary thought. But a consistant one, at that. Hasn't the government been encouraging ALL Americans to borrow more than they need for the sake of our red hot economy for the last 20 years?
It's times like these and "solutions" like those that betray the true intentions of our Wreckonomy. Congress will give the Fed the authority to lend on Congress's behalf. Keep the money pumping into the system. Money to prop up values on billions of dollars of worthless assets. Money to pour over insolvent institutions. So much money that we never really see the actual issues.
In the end, when all else fails and the true nature of the giant credit virus comes into full view... Congress's debt is OUR debt. Your debt. My debt. America's debt.
Thus, the bailout marches forward.