No this is not the same as TARP.  This is a new plan, that including other programs in place amounts to trillions.  Even Dr. Evil can’t fathom trillions.

The total package won’t be fully understood until it’s all over.  Most of the trillions right now are committed, but have not been spent.  The huge amount of money fits into three categories now as they are providing three different roles:

Role 1, Insurer:
The FDIC will begin insuring debt in an effort to get the debt issuers (banks) to lend more money.  With a government backing the debt investors are more likely to buy it.  This will allow banks to then issue more loans, bolstering our economy.  We already know the government will insure $300 billion of Citi’s debt, but this is an addition $1.5 trillion of funds that are committed but not yet allocated.  Keep in mind, insuring debt means the government only pays up if there is default, this is not $1.5 trillion down the drain.

The Federal Reserve will act as an insurer for money market funds the way the FDIC does now with deposit accounts.  There is also now insurance on the accounts companies use for their primary operation, which can sometimes carry very high balances (think Microsoft payroll).  Other snippets include the $200 billion backing Fannie and Freddie, and the money used to back Bear Stearns.  The total funds committed for insurance is $3.1 trillion

Role 2, Investor:
TARP, which was the original $700 bailout is included in this group.  I’ve covered that extensively by now but for a quick recap: the government is using the money to buy stock in the banks, the banks then use the new cash to do new loans and all that jazz.  Also included is the direct purchase of commercial debt (loans a company takes out to fund operations or expansion) and the commitment of the government to buy the bad loans from Fannie and Freddie.  That is not to be confused with the plan to back Frannie debt in the insurer category.

Role 3, Lender:
This group includes $900 billion for short term loans to banks.  This is debt that will almost certainly be paid off (with interest mind you) because the terms of the loans are 28-84 days.  I think these loans are perhaps the most important.

Another $500 billion is committed by the Federal Reserve for loans.  The Fed has always done this, I think this was included in the announcement as a reminder so people won’t think the government is hiding things.  There are some other bits and pieces but that pretty much covers it

All said and done, we’re looking at over $7 trillion in loans, investments, and insurance coming from the government to American business.  This is an unheard of bailout.  It creates all kinds of questions.  The biggest one for me is, why did we need Congressional approval for TARP but not for most of this other crap?  But you may also be thinking, where will all this money come from?

For the insurance, at this point it is only a promise to back up something if it’s needed.  The government will issue new bonds if they need to raise the money, only if though.  Who would buy it?  At this point the modern financial system around the globe depends on the stability of the American government.  Anyone with power to invest loads of money knows this.  Governments and private institutions will happily invest in American debt until the cows come home.  Most of the other funds needed for all the programs will be financed with debt as the programs come online.  Yes this is a lot of new debt, I hope the government tries to tighten its belt elsewhere during these times, but don’t expect it.

The whole plan is to inject more liquidity into the market.  The faster we make loans, invest, and do business, the better our economy is.  We started with that consumer bailout earlier this year which did nothing.  They are now attacking the root problem in the economy, this was no done during the Great Depression.  It is our only hope at this point.  The message the federal government is sending with this is they are going to go to extreme circumstances to save the economy and prevent depression.  I do not yet know whether or not I support this.

There are dangers to this plan of course.  Most notably, if all the money allocated to this bailout is used, we could face times of awful inflation.  The value of the dollar would tank, and the government would no longer be able to issue debt to finance itself out of hell.  The government would be bankrupt and anarchy could result.  Anarchy would be the end of capitalism.  If the plan works though, the government would come out on top, having made billions in profit.  These billions could be used to pay down the national debt and refund social security.

I remain committed to the idea that the government sets a bad example. At this point they are bailing out debt with more debt.  As long as we have faith in the American dollar we will be fine.  If we lose faith in the American dollar like we lost faith in real estate as a stable investment, we’re screwed.

Below is a link to the NY Times story, which has a bit too much liberal twist to be news.  They do a good job of summarizing though, and provided a great chart of the money that will be used, showing how much has already been spent.

Read NY Times

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice.

categories: banking, economics, government