Monday, November 24, 2008

Is the US Treasury Getting too Big to Fail?

For an administration based on an ideology of untrammeled capitalism and which demands that all socially useful programs meet cost-benefit calculations heavily tilted toward inaction, the government seems to be getting little bang for its buck. Here is a Bloomberg estimate of a commitment of $7.7 trillion. Yes, the government can recoup some of this money, but probably not a lot.

Pittman, Mark and Bob Ivry. 2008. "U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit." (24 November).

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.


The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.


Sandwichman said...

Well, I think it is misleading to suppose that a commitment of $7.7 trillion represents an outlay of anything approaching that number. Only a percentage of the guaranteed debt will go into default and there will be some recoverable amount even from the defaulted debt. That still leaves a big pile of money -- but maybe an order of magnitude less.

TheTrucker said...

I do not believe that loans from the Fed to the financial institutions amount to a liability of the tax payers. All appropriations must begin in the House and be passed by both houses of the Congress. I have seen no "bailout" money approaching the figure of even one trillion. Succinctly: I am not going to pay because my representatives did not appropriate these funds. The Federal Reserve does not run this Country. We have an elected government for that purpose.

TheTrucker said...

elected government

Barkley Rosser said...

Loans from the Fed are not the liability of anybody. In that regard, the Fed has always been a sort of magic act, creating money out of thin air whenever it writes checks to brokers to buy repos of US government debt as part of its open market operations (and likewise destroys money when it takes chekcs from those same brokers when it sells securities, and simply drops the check into a vanishing hole).

However, the recent events have transformed the very nature of the Fed in ways that are still far from clear. Whereas it used to be the funder of the Treasury, now it has almost no Treasury securities, even as the Treasury is now effectively backing it in its new role as de facto world central bank, taking on dodgy assets in swaps from Europe, Mexico, Brazil, Korea, and elsewhere.

One could say that this means that US taxpayers are now lying behind the Fed, but given the huge deficits we are about to run, I would say that it is ultimately the Chinese who are lying behind it. Let us hope that they are willing to do so, even as they are running their own monster stimulus package.

TheTrucker said...

When the Fed creates loans to entities other than the United States Government, then the Fed is operating outside its charter. If the Fed simply purchases bad assets and destroys same then the Fed is increasing the money supply and destroying any liability in reference to its open market operations. I suppose it is possible to do a cute little dance by first loaning the funds and then writing off the debt, but the net result is the same. The Fed could buy junked cars with the same results. In either case, there is no responsibility for the "taxpayers" in regard to these created funds. These "loans" must/should/do not become part of the public debt.

The insinuation that the taxpayers are on the hook for this money is, I hope, very wrong. The result of these "purchases" should normally be inflationary in that more money is being added to the money supply. But as it stands it is merely a way to make the hucksters more rich, i.e. they get all the created money. But in no way should we allow this insinuation by "Bloomberg" concerning a public debt. The financial conscription of the people does not happen in the Constitutional Republic called America. That is adding insult to injury.

In a properly operating system of the US Central Bank, the Chinese get the green weenie. The currency is devalued as the Fed buys all this stuff (T-Bills for instance) and the current T-Bill holders will be repaid in currency that is worth less than the currency they used to purchase the T-Bills. That is the way this rig was designed to work. It had better work that way or there is going to be some very big problems.