Economic Recovery, Part II – You, Me and Everyone
Posted by Warren Peterson on November 30, 2008
Where is the Federal Government getting the billions, nay trillions, of dollars to fund the (choose one) bailout, stimulus package, economic recovery? So far, it’s not from the taxpayers. The Treasury is borrowing the money from investors and using it to purchase assets and provide subsidies. In order to inject cash into the economy, the government is loaning money to or buying interest-bearing stock from select banks and companies like AIG insurance. In theory, this creation of new money is not inflationary because the government is getting something of value (stock etc.) in return. Hopefully, when the economy recovers, the Government can sell the stock and get repaid for loans. Hopefully, the interest and capital gains from the loans and stocks will cover the outright subsides and purchases of non-performing assets like bad mortgages and consumer loans. The Feds also are guaranteeing some privately held assets. For example, the FDIC increased insurance on bank accounts from $100,000 to $250,000. Hopefully, this will halt runs on banks by depositors fearing collapse of their bank. Hopefully, it will reduce the number of failing banks and therefore the Government will not have to pay any insurance claims.
These actions, we are told, are necessary to deal with the unprecedented economic crisis. The smartest people from Wall Street to the ivory towers of academia are working on the problem. Hopefully, they’ve got the right solution. Hopefully, Congress won’t make it worse.