I guess that what needs also to be taken into account is the impact on individuals savings, etc... so I am personnally not saying that the governement shouldn't do anything, just that there is a need to be very careful about understanding what is being proposed and the consequences.
Among these things, as I have already mentioned several times, where does the money come from? Then, by who and how will the amounts commited be paid back?...
Very few people seem to understand in the US how exactly the Federal Bank is creating/lending money and how this money is paid back. Considering the lack of liquidity of the private banks making up the Federal Reserve, there are probably 2 possibilities:
1. This money is created out of thin air without any real backing -> what are the consequences? It can only result in a further weaking of the US$ and more inflation in the country, correct?
2. This money is lend by non US banks -> what are the consequences? The actual result if basically the sell out of US assets to non US entities, among which China is probably a major player, correct?
Besides, isn't the money proposed in the end going to be used to help the banks making up the Federal Reserve itself?
I would love to hear a clear explanation on this.
Cheers,
Bernard
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I'm afraid there is going to be an impact on the individual and its going to be bad, long term. How can it not? But that is really the crux of the current negative feelings toward this bill. It bails out the big guys who played badly and forces the little guy to pay the tab.
Of course this is mostly speculation as we really don't know what is in the bill. As of this morning (Sunday) the word is that an agreement has been reached in principal but the bill has yet to be drafted and voted upon. I'm not holding my breath that the bill is a good one and I'm not convinced it is needed. There are a bunch of competeting plans for fixing this crisis out there that don't involve a 700B (or more) bailout.
The sad but true fact is that there is going to be some real pain involved in this correction. As I stated eariler I'm living it. For the past 25 years my career and business was based on the RV, Marine and Cargo Trailer industries. It was a very good business for many years but the products were either toys or tied to the construction trades. Toys required people with good incomes and an access to credit..and cheap fuel. Construction the same. For the most part those things are gone and the industries are way way down. I've had to close my large studio and regroup. Thats life. I'm not asking anyone to fix it for me. I was fully aware of costs, risks and rewards. Thats all I expect from the guys they are trying to bail out.
I'm sorry for writing a book, but this is complicated stuff. Sadly this is a worldwide problem. EVERYONE has been living large for a long time and to borrow a phrase, the chickens are coming home to roost. I don't believe there is a quick fix and I don't think the correction will be a soft landing. I really hope I'm wrong.
Here is the best "easy" explanation of the Fed and money I have read. Of course this is an huge topic , the subject of many many books...
1. where does the money come from
What we call money in the USA is actually Federal Reserve notes (take a look at the bills in your pocket). All outstanding Federal Reserve notes are considered liabilities of the Federal Reserve. The Federal Reserve has to match liabilities with assets, so it can't simply "print money" when it want to increase the money supply.
However, it can buy Treasuries, either directly from the U.S. Treasury or private banks. Since Treasuries are considered assets, the Fed can pay for the treasuries with newly created Federal Reserve notes.
The Fed can also temporarily increase the money supply by borrowing securities and lending new notes for a short time. These are known as repos (repurchase agreements). The most common repos last either overnight or for two weeks. At the end of this time, the bank gives back the money, which is destroyed (since the Fed no longer holds an offsetting asset), plus a bit of interest which helps pay the Feds costs.
These increases - both from repos and treasury sales - are greatly magnified in the economy, because all of the new money is placed in a bank where it can be loaned out (less reserves). Since a bank only needs to keep 10% of its deposits on reserve, the banking system can essentially loan out each dollar 9 times over. This is called the money multiplier.
If you take a look at the Fed Balance Sheet (I'm referring to the 8/16/07 version, but the link will take you to the most current one), you'll see that the Fed is holding assets of $867 billion in Treasuries, $36 billion in repos and a few odds and ends like $11 billion in gold. Their liabilities are dominated by $812 billion in "Currency in circulation."
The effect of the money multiplier can be seen be comparing the currency in circulation with M2, the Fed's most all-encompassing published measure of all the money in the economy. The last published M2 data is for August 6, when M2 was $7.3 trillion.
2. who gets this money
First banks and the U.S. Government, then everyone through loans from banks, interest payments from the government and government spending.
3. how do they pay back
4. is there an interest they have to pay
Yes, people and businesses and banks pay interest on their loans and the government pays interest on Treasuries.
5. who is eligible to use the discount window
Banks. The window (think bank teller window) is a Fed program where banks can get overnight loans at slightly higher than market rates. Banks will normally borrow these funds from each other, but in times when more money in aggregate is being withdrawn from banks than deposited, Fed loans through the discount window help ensure there is enough money to go around.
6. is that free money
No, Fed overnight loans are fully secured and the bank does pay a premium (typically 1%) for these loans. But the discount window provides an important safeguard in a credit freeze, by allowing the bank to raise money by borrowing against collateral that might be impossible to sell in the open market.
