It’d take a few hours to properly explain how utterly stupid the Bailout Plan is – we’d have to get into the common misconceptions of Keynesian Economics (aka “Priming the Pump”), the discrepancies between today’s bill and the Iaccoca lead bailout of Chrysler in the early 80’s, how the dot com boom spawned irresponsible lending practices under Clinton and were further worsened by Bush and the Federal Reserve after 9/11, the difference between the Federal Reserve and the Department of Treasury, how our national debt is funded, as well as what a proposal like this would look like in the business world and why this bill is laughable in comparison.
You don’t have a few hours? Neither do I. Ignoring the trivial fact that no one to date has been able to quantify the short or long term benefits of this bailout – the best argument for the plan is “it’s our only option” or “not doing so will result in an economic crisis” (if this is really the case why has no one been able to explain how this will happen in concrete terms?) – how about answering one very simple little question: where is the bailout money coming from?
The taxpayers, right? But we have a national debt of 10 Trillion dollars, so that’s not really true. Our taxes don’t even cover the current budget, let alone an additional $700 billion – $1.2 trillion.
The Federal Reserve sells Securities (US Government backed IOU’s) every three months to finance America’s spending. So the short answer is the +700 billion will come from the sale of government issued notes, bills, and bonds. Now keep in mind we have no money to back them, but hey the United States is a big country and our word is pretty well respected (at least for now), so people buy Securities believing we’ll pay them back.
Anyway, the next question is who buys US Securities. Really anyone can buy them but roughly half are owned by foreign governments and half are owned by the US Government. Something sound kind of weird there? Yes, we own approximately half of our own debt. Where do we get the money to effectively buy our own debt? Ever heard of the Social Security Fund, maybe the Federal Employees Retirement Fund? Those are the two largest domestic holders of US Securities. Some nice colorful graphs explaining all of this can be found here.
To recap (1) the US government has no money to use for a bailout (2) so, it would have to borrow money from American citizen’s retirement funds and foreign governments, but have no assets to back the loans (3) the amount borrowed would be equal to 10% of the existing national debt (that’s a lot)
What do you think will happen if a foreign government calls in their debt (admittedly doubtful) or the baby boomer generation reaches retirement (absolutely certain)?
(hint: a heck of a lot worse economic crisis than what we’re facing today)
Update: Congress ultimately passed an ammended version of the Bill described here. It’s better than the original plan but still not in the best interest of our county’s long term future.