Share this story
Close X
Switch to Desktop Site

Where did all the bailout money go?

Next Previous

Page 2 of 4

About these ads

Many US interventions amount to lending, investing, or insuring, not direct spending. Hence, the cost to taxpayers will depend on how the economy fares, which will affect how many loans or investments fail to pay off. At a minimum, though, nearly $1 trillion already has been committed in direct spending – the Bush and Obama stimulus plans.

Where's the money coming from?

It comes from two main sources. The first is the Federal Reserve, which can expand its balance sheet (that means "spend" to you and me) at will. The goal is what Fed Chairman Ben Bernanke calls "credit easing" – to ensure a normal flow of credit at a time when many institutions and investors are reluctant to lend. But when the Fed expands its asset base by making loans, a side effect is to expand the money supply in the economy. That can lead to inflation, but so far it's just offset part of the contraction in private-sector financial activity.

The second is taxpayers. It's not that income-tax rates have gone up lately, but Americans are on the hook in the long run. The spending adds to US debt. This also means, by the way, that the rescue's ultimate cost depends on future changes in the government's borrowing costs.

For now, the Treasury can issue bonds at very low interest. But those debts will probably roll over into new T-bonds a few years from now, quite possibly at higher interest rates.

Why is this big bailout happening?

Without intervention, the recession would be much worse, say policymakers. The causes are many, but the deflation of an overheated housing market triggered a chain of problems. Investors, who had financed a great deal of lending by buying credit products, retrenched. The health of banks deteriorated. The stock market fell. All this rippled out to affect consumer confidence and business prospects.

Now the goal is to keep job losses to a minimum and to prevent a lack of credit from choking the hoped-for recovery.

Next Previous

Page 2 of 4

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.