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I have to say that the taxpayers are always involved. You are absolutely correct in saying that no one will have to shell out a dime to do this (though the amount of the deficit that goes towards debt service will increase). However, it does increase the debt by 3/4 of up to trillion dollars. Now obviously we can potentially get that back by the liquidation of assets under the Trouble Assets Recovery Program (TARP) as spelled out in the Senate's bill (which I have read). So essentially the selling of treasury securities raises the money to do this but the taxpayers are on the hook for the interest while the debt is outstanding and ultimately the debt itself unless the government fulfills its implicit requirement to retire this portion of increased debt.

As I stated in an earlier post, this extra money will sit in the treasury and be used to offset the deficit. Furthermore, doing a word search on the bill, I can't find where it requires the Secretary of the Treasury to repurchase these debt instruments created to finance this. I may have missed it but after reading the bill (a heavy skim job admittedly but there's lots of boilerplate) I've seen nothing about using the proceeds to pay back the money borrowed to finance this program.
Prediction, the government will recover money through its sale of trouble assets purchased from troubled institutions, however it will go into the general treasury and be used in the budget calculations and someone (McCain or Obama) will claim to have reduced spending in reference to the deficit.

This seems to be a great time to sell US treasuries, given the demand. Could be financed at 1%?

The tax payers are on the hook for the interest on those treasury bonds as well as if/when the government takes a loss on the rescue/bailout.

How likely is it that the government will make a profit (or even break even) from the rescue/bailout? I think it's not very likely at all, if there was a profit to be made in buying Mortgage Backed Securities then the private sector would be buying them, right?

Great perspective. I would be interested to hear your thoughts on the risks associated with making a considerable addition to the supply of t-bonds and your expectation of the effect on their price both at offering and at the attempt to buy them back.

I would also be interested to hear your comments on the attempt to re-inflate the housing bubble, which I theorize is one of the objectives of the bailout.

The taxpayers’ taxable incomes depend on the state of the economy. If the package prevents a recession from deepening, taxable incomes will be higher than otherwise, and the relatively higher tax receipts will cover the interest.

The other alternative (to “save” the interest expense) is to let the economy tank, let incomes tank, and let tax receipts tank.

“Times Interest Taxed” (see http://tinyurl.com/3rrwfh ) will be better (i.e., larger than it would have been otherwise) if the package achieves its goal of propping up the economy and therefore taxable incomes, in spite of the interest on the bridge financing.

Lastly, maybe the bill *should* specify repurchase. Maybe the reason it doesn’t is because everybody who currently thinks the taxpayers will be funding it are clueless about the actual process, and therefore can’t be expected to think outside the box.


Right. Here’s what I said in another thread…

The USA will always be able to sell its bonds on the bond market; the main question is, what interest rate will the buyers demand? That depends on the buyers’ confidence in the dollar and in the US economy, relative to other currencies and the underlying economies behind them. (Key word: “relative”)

What do they think now? The dollar has been strengthening rapidly, especially against the euro (…not sure about the rupee; I’ve never had a reason to watch that currency). Deflation increases the value of dollars, which is one reason everyone wants to stop doing commerce and get into cash asap. Also, T-bill rates are near zero. Both are indicators of a flight to safety.

In short, it looks like we can plan on more than sufficient demand for US Treasury debt instruments, as usual. All the more reason to give the lenders the T-bonds they want, and leave the taxpayers alone, as we fund the rescue (“depression-prevention”) package.

See my response to Rich regarding interest.

Will the government “make a profit”? After everything settles out, maybe a few tens of billions; or, maybe it will “lose” a few tens of billions.

The “worst case” for the asset swap is nothing in comparison with the worst case for refusing to intervene. The market for mortgage-backed securities is not functioning, because there are no buyers. The first benefit of the “rescue” will be government stepping in to “discover” the market prices. Many pundits think the first discovery will be that the government can pay higher than book, due to the flaws in the mark-to-market rule. The next discovery might well be that private sector firms would then be willing to pay more than the government paid. That would be the “profit” scenario. The other outcome would be the “loss” scenario.

After everything settles out (assuming the “loss” scenario is what happens), the interest on the “loss” (the T-bonds that would remain out there) would be more than covered by the additional tax receipts a healthier economy would yield, relative to a deeper recession.


My thoughts: Extra T-bonds are almost no risk whatsoever, and certainly far less risk than not attempting the rescue.

Reinflation of the housing bubble was the (straw-man?) “moral hazard” objection to the increase in FDIC deposit insurance limits. My thoughts: I don’t buy it. I think this crisis has made a lot of people smarter than they were before – many business managers, many home buyers, many government regulators, and yes, maybe even one or two politicians.

On taxpayers:

The only way they will be on the hook is if tax rates are raised substantially. That would be economic suicide right now. Think Obama has the answer? Think again. His plan is nothing more than a political game of income redistribution and there isn't enough at the top to redistribute to make a dent. Furthermore say the fat cats get their tax rate increased. Fine, who then has the money to take a risk on IPO's for new businesses to develop alternative energy? Joe Six Pack and Hockey Mom's? Man, they're scared as hell that their home equity will nosedive, that Joe may be out of work and JR.'s college hopes go out the window.

We're staring spiraling deflation in the face.

Free market solutions? That's crazy. As Steve pointed out - there is no market for this stuff.
And the carnage is spreading across the globe.

Damn. I'd like to back up the truck to WDC right now.


Thanks for the reply. I read the bill again and there are sections on "recoupment". I must say that it is limited to proceeds or excesses will be put into the "general treasury" to be used for debt repayment. This is akin to me getting an extra $500 in my checking account ostensibly for paying off a credit card. But that money is not distinguishable in the account from the other money except perhaps on some excel sheet that says such funds are pre-allocated to debt repayment. However, I'm in deficit spending mode so do I just look at it like I have to borrow less "today" (deficit reduction) or do I apply that to a credit card and have to use another credit card to pay another bill.

You make a very convincing argument about debt and deficit not being a bad thing. As a responsible business executive (I'm not referring to me) this is not a bad proposition. However in the hands of government that spends other peoples money without too much regard for problems beyond the public's short attention span I still have trouble taking the bailout as a good idea. And maybe your debt to gdp ratio may trump my argument. I still don't like the government involved in sorting out business problems. I'd almost prefer no interest loans to business based on some strict criteria than have the federal gov't take over in the actual sorting out of the mortgage mess. Once you give gov't the power to do something, no matter how honorable the intention, it never wants to relinquish.

Regarding the recession. I don't believe at least by definition we are in a recession (as defined by two successive quarters of negative growth).

What I don't understand if this is nothing but a T-bond transaction, why did it require an act of Congress other than raising the debt limit? Why buy Class III assets at all? Aren't the sale of the bonds - cash to the Treasury (i.e. taxpayer money as long as we are in debt) being used to buy (with this taxpayer money) Class III assets in hopes of resale at some time in the future (hopefully at a profit for the taxpayer) to rebuy the T-bonds. It seems that there is taxpayermoney involved, just not from taxes but debt (+ another $150 billion in pork debt).

All this assumes that this works (in theory) as planned, although there is no evidence that it will. Since about another $900 billion has already been yacked this year yet here we are.

I maintain that we would have been better off letting all of these foreclosures occur, then rebought at auction at pennies (like we're essentially doing now anyway) directly instead of inefficiently unwinding complicated instruments. The market would have set a bottom, and people would be buying real assets now. Instead all of the government intervention did was prolong the inevitable and at the mean time brought us to this crisis du jour, and we STILL haven't hit the bottom. Now we're headed for a deep 2-year recession (at least) instead of heading out of a an average one.

What is this? 1932? 1976? Bush is Hoover or Ford, which is bad enough; but wait 'til Obama plays Roosevelt and Carter rolled into one.

Steve and others - if it doesn't come from the taxpayer, then I guess we can pass a law that no bailout bonds will be paid by tax money and no bailout bond is eligible for discount at the Federal Reserve. Then we'll see how they trade...

You guys know that the bottom line is - any bailout by the authorities comes from the taxpayer one way or the other.

* by inflation if the government sells bonds to the Federal Reserve, reducing income

* by selling bonds to foreigners which displaces exports, reducing income

* by selling bonds domestically, causing higher interest rates than otherwise - which reduces income

* by taxation, which reduces income

I agree we need to avoid needless collapse, but just where is that line? A lot of institutions need to fail, and forced selling by the failures is what recapitalizes the remaining institutions (the remaining institutions get to buy assets under their genuine value which recapitalizes the system). In my view, early non-selective bailouts are a big mistake.

Guarantees of deposits might not be a bad idea to prevent unneeded collapse - but then again, the run on banks are what is forcing those weaker banks to fail (like WAMU). A major issue - which is made worse - is the authorities allowing institutions to continue to hide losses which locks up the system.

Steve, at the risk of appearing tedious, I must again ask the question I posed in connection with the deficit: With emails running 100 to 1 against, was it not the duty of our elected officials to vote down the bailout? How can we be said to have a functioning democracy, a “government of the people”, when our elected officials act contrary to the wishes of the people?

In your previous reply, you argued that, despite protests to the contrary, people actually want deficits. Is this your explanation for the bailout too, i.e., that we actually want the bailout even when we say we don’t?


The House voted it down the first time for precisely that reason: constituents feedback was "50% No, 50% Hell No." Then, many of those constituents watched their 401K balances plummet the afternoon after the No vote -- so their feedback switched to 50/50 yes/no. Just enough to change the outcome on Friday. The people have spoken. (Their reasons may have differed from mine, but I'll take the end result, and I will hope it's not too late.)

Also: "the people" wanting something is occasionally insufficient reason. That's why the founders took pains to guard against the "tyranny of the majority." The mob can be wrong, and it is fickle.

By the way, I heard Tony Ryan, Acting Undersecretary of the Treasury, say this morning that the Treasury will begin raising money for its asset purchasing program by selling bills into the bond market.

What a surprise. I bet the "taxpayers" will be relieved, don't you?

I checked with Gallup.com, and a poll taken just before the revised bailout did indeed show that a majority of Americans favored some kind of legislation on the financial crisis. I was not aware of this sudden reversal of sentiment but I should have checked before posting. So...you are right. Thanks for replying.

> and yes, maybe even one or two politicians.

Oh, come now. ...And maybe a Pulitzer Prize-winning one-eyed twin will be trampled to death by a rabid female elephant while standing at the South Pole.

Let's stick to reality, my man.

And speaking of that --

Prove to me that you exist.



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