Bailout: It's not funded by taxpayers

Seems to me the main sticking point that almost prevented an agreement on the falsely-named "bailout" package was the false impression that we taxpayers will have to reach into our pockets and somehow come up with seven hundred billion dollars on short notice. And I think that false impression resulted largely from the answer Jim Bunning got when he pressed Secretary Paulson for an answer to his question, "Where will the money come from?" Paulson, I think, answered too quickly; "The taxpayers" was his answer.

I wish he had said "bond buyers" instead of "taxpayers," because that's how it will really be funded. But he didn't. He said "taxpayers" -- and, unsurprisingly, that scared a lot of taxpayers.

I checked the wording of the not-a-bailout plan, and it clearly refers to Title 31 of the US Code as one of the main levers the Treasury will use to execute the plan: it will issue treasury bonds, bills, or notes as necessary.

When the Treasury sells T-bonds to willing buyers in the bond market, the transaction does not involve unwilling taxpayers. (Does Jim Bunning know that? How about Ron Paul? I'm not so sure.) In any case, I decided to build an eight-picture series of the "asset swap" to show why taxpayers need not be involved at any point in the swap.



The emergency situation as of last Friday. It would remain like this, or get worse, if Congress had not come together over the weekend



Approval of the plan enables the Treasury to go to the bond market -- repeat, the BOND market, NOT the taxpayers -- to obtain funds.

Uh-oh, those new T-bonds indicate that the national debt increased, right? Yes, but please don't have a heart attack yet; keep going.



Proceeds obtained from the bond buyers are used to buy up the questionable mortgage paper from the financial sector.



Liquidity in the banking sector is restored; banks once again start lending small, medium, and large businesses the money they need to meet their payrolls. The danger of a severe recession or a deflationary depression has been averted. At the same time, the Treasury's rescue process, highly transparent to the public, starts sorting out the good paper from the bad paper. (Let's call this a "cleansing" of the paper.)



The Treasury, having made it easier to judge the value of mortgage paper, auctions the paper off. The highest-bidding banks and financial firms buy the paper back from the Treasury.



Now the Treasury has money to repurchase T-bonds from willing sellers in the open bond market.



If the Treasury's cleansing process reveals enough high-quality paper, auctioning it off could yield a breakeven -- or even a profit -- for the Treasury.

And even if the process yielded a loss, it would mean recovering the difference from the financial sector, or at worst, not buying back quite all of those T-bonds.



Can you spot the only difference between this and Diagram 1? Hint: The taxpayers' funds didn't get affected by the process.

Conclusion:
One of the most unfortunate aspects of the last seven days' dialogue, in my judgment, was the mistaken impression that "taxpayers" would somehow have to come up with "seven hundred billion dollars" on very short notice -- and hand it over to Wall Street CEOs. No wonder everybody was angry; clueless talking heads were on every channel, egging us on. I was walking past a TV from which the dangerous renegade Lou Dobbs was sarcastically perpetuating his version of that false characterization, but I didn't get to hear more than a few sentences of Dobbs's uninformed tirade. Reason: his voice always triggers the involuntary reflex of getting myself away from that TV quickly as possible.

Obviously, there are all sorts of details that need to be worked out regarding the cleansing and auction processes -- and there are all sorts of good ideas being floated for those, too. The credit markets have yet to speak today (Monday), but I'm glad Capitol Hill came through with a plan that has only a few ugly ornaments hanging on the basic Paulson/Bernanke package. This should be good news to the markets.

Source

In a time like this it is important to get the facts from experts and not from some politician who is trying to keep their job

I highly recommend reading Steve Conover's site. He is informative and and extremely intelligent. He tries to explain things as simply as possible and answers any questions you may have. But I must warn you that before you ask questions, you must first read a good portion of his articles.

For those that don't understand how money, the fed, and the treasury work, I recommend reading the money series(1-6)

If the process yeild a loss then Treasury will have to pay interest to the bond holders each year which comes from the tax payers.

In fact the tax payers are paying interest from day one the Treausry sells US Treasury paper to bond holders. Bond holders lend the money to the US for a price and that price is paid by tax papers. It's not free money.

Saying that the tax payers are not paying for this is like saying the Fed doesn't 'create' money out of nothing.

I disagree wholeheartedly that this is not a taxpayer burden, in fact, I believe that Paulson's quick answer was the truth..., he didn't have time to make up a lie, and it didn't matter to him anyway. This 'matter of fact' is simple. All of this so-called wealth must come from a production point. T-Bonds are another vehicle created to maintain the illusion that there is some VALUE being moved here and there.

In the end the credit and the principle comes out of productivity and assets, they have none, we do. But perhaps they'll invent a new term to obfuscate the parasitic relationship bankers have in our economy and market.

Originally posted by Maxmars

If the process yeild a loss then Treasury will have to pay interest to the bond holders each year which comes from the tax payers.

In fact the tax payers are paying interest from day one the Treausry sells US Treasury paper to bond holders. Bond holders lend the money to the US for a price and that price is paid by tax papers. It's not free money.

In the OP the article states

And even if the process yielded a loss, it would mean recovering the difference from the financial sector, or at worst, not buying back quite all of those T-bonds.

Do you disagree with that?

Saying that the tax payers are not paying for this is like saying the Fed doesn't 'create' money out of nothing.

Fed creates money out of the demand for it. I suggest you take a look at the money series(1-6)

I disagree wholeheartedly that this is not a taxpayer burden, in fact, I believe that Paulson's quick answer was the truth..., he didn't have time to make up a lie, and it didn't matter to him anyway.

We sometimes forget the rate at which politicians can lie.

In the end the credit and the principle comes out of productivity and assets, they have none, we do.

Which is exactly why people buy the bonds and give it value.

Listen I'm no expert on the economy and so forth, but that is why it is good to see differing opinions. I suggest you leave a comment on his article so you may ask him these questions(if someone else hasn't already asked him in the comments section.)

[edit on 6-10-2008 by Cool Hand Luke]

reply to post by Cool Hand Luke


Thanks,

I will check out the money series as suggested. Pardon my incredulity; I have a problem with any investment model based on fractional reserve lending.

It's ALL money from nothing.

Originally posted by Maxmars

It's ALL money from nothing.

Why is that a bad thing? I'm not trying to be confrontational. This is more of a question to anyone looking at this.

By the way it's not technically true. US has a 14.5 trillion dollar economy. That means that all the goods and services in the US is worth 14.5 trillion dollars. When more goods and services enter the system (ex new jobs, technologies, products, etc), they are given value at which is determined by the market.

Now let's say the Fed stopped printing money. What would happen with the country's economy that continues to grow. Where would new workers get their money from? It's called deflation and the economy would fall flat on its head.

I think that the point is that money in debt is as safe as what it is pinned on. The taxpayer is more of a bet than a house nowadays.

Originally posted by redled
I think that the point is that money in debt is as safe as what it is pinned on.

I think that line pretty much sums it up. People forget that the national debt is pretty much the same as personal debt.

I mean if you have a mortgage that consumes 40% of your income but all of sudden you get a raise or get a higher paying job and now the mortgage only consumes 25% of you income monthly and the over debt keeps going down and the asset appreciates the whole time, is the debt really a big deal? But now you want a higher paying job and decide to go to university and you need a student loan and for the heck of it a new vehicle. Now your total monthly debt exceeds your income. But what happens in the future when you get your higher paying job and payments only take up 20% of your income and now you have a vehicle house and an education.

People should not be against government spending. Rather they should be critical as to where that investment money is going and ask is this going to grow the economy?

[edit on 6-10-2008 by Cool Hand Luke]

Your diagram was nice and helpful to the people that didn't understand how the crooked feds pump money into the USA through beautiful pieces of green paper, and trade it with USA's own beautiful bond paper. I also liked the fact that you revealed that the taxpayer has zero chance of making the profit when the government sells the assets back at a 75% market increase (which they arbitrarily decide).

However, what the tax payer will do is pay the taxes on the 7 billion dollars. So you should've had a diagram where the american tax payer blindly enables this outright deception by the utter disregard of their intelligence by the PTB.

Nice thread!

AAC

I think that the main problem is the consumer. I have first hand experience 10 hours a day with the average consumer and they're all alike. The first thing you figure out is that a majority of the consumers do not want to pay for anything. They all expect all services and items free. Then the consumers make demands and the institutions distort things like the EOAC to cater to the greedy pathetic consumer. I blame the people, not the government, not George Bush but what the consumers demand. On one hand you have the consumers wanting complete freedom to dictate their own finances, then when it explodes in their face they want someone to pick up the pieces. My favorite excuse is "Why didn't anyone tell me?". I would like to respond, "should the bank assume you cannot handle your own finances?"
I purchased a home three years ago and I bought a home inside my means, I did not expect anything more than I deserved for how hard I work. Anyone who wants to blame the bank should also blame their idiot neighbors and friends. I think what's most frustrating for me is that every day I hear people repeating the same garbage and looking to blame everyone else. One excuse I also like is about not "reading the fine print", well it's printed, are you blind? Read it. Maybe you and your consumer friends can come sit in a circle around me and I will read aloud your policy; maybe we can find the guy who made these pictures to illustrate it for us. Any of you in this situation have nobody to blame but yourselves.

reply to post by etombo


WOW... That post should be posted every where no matter the medium. If everyone took some responsibility for their actions there would not be any crisis to speak of.

It seems to me everyone is too busy looking at other people to blame rather than just looking in the mirror. I'm sure you have noticed this on this forum and every media outlet for that matter that people love to foam at the mouth ready to look for someone to hang, and quite frankly, I am getting pretty sick of it.

EDIT: Another thing I don't understand is when you buy a house, for most people this is the single biggest investment they will ever make. Does it not make sense to read the fine print and also make sure you can actually afford it?

I guess why I can't understand this situation is I actually hate being in debt with a passion. Whenever I have taken out a loan, I always the biggest payment as possible to get rid of it as fast as possible even if there are penalties to paying it off too early. But thats just me

[edit on 8-10-2008 by Cool Hand Luke]

[edit on 8-10-2008 by Cool Hand Luke]

yeah it's all a scam to own our free will. Direct ownership of a person (i.e. obvious slavery, serfdom) is too risky, with the threat of revolt and all that. So they have slowly developed indirect forms of slavery (i.e. employment and monetary systems) and taught all the following generations to worship working for these systems, and so those generations taught the following generations, and on and on... and now here we are. The whole world worships money as life blood, and it's all bull#.

When will people stop loving money? When they starve to death because the factories have all been shut down or destroyed, the forests and fields have all been burned or ravaged somehow, and they have a bunch of pieces of paper in their wallet that they can't eat?

All banking, all currency, all employment, all government, all civilization, all leaders, all rules, it's all a form of mental slavery.

But almost nobody will see that because their minds are still slaves.

We're gunna be talking about the economy this and the economy that until the hour before Armageddon, and after the bombs drop, the humans are all dead, and the rats and roaches return to the surface to reclaim the Earth, nobody will know after that why an economy, or a language, or a celebrity, or any of our stupid # was so important.

It'll be back to nature as usual.

Unless we wake up.

[edit on 8-10-2008 by dunwichwitch]

reply to post by Cool Hand Luke


Cool hand,

Don't take this the wrong way, but there are some serious flaws here:

Box 2 of 8 says "Treasury sells T-bonds to willing buyers"

Yes, this is true. But one of the largest "willing buyer" in T-bonds is our Federal Reserve. When the Fed buys up these T-bonds or any asset for that matter it writes a check to itself, in other words...made money out of thin air. This devalues yours and my money in the bank, this is an increase in the supply of money.

Also the denomination for these notes range from $100 to $1,000,000. There are two problems here.
1) If a private investor buys several of these $100 notes or maybe even up to $10,000, it "crowds-out" investment capital that could have been used in the private sector for investment in plant and equipment and hence jobs. Investment is the primary engine for job creation. So, when this capital is taken out of the market, there is less investment for companies that may need it.
2) Most of the other holder of these bonds tend to be other "Central Banks", who expect a rate of return on their asset. So they expect to be paid back.

But continuing on...

Box 3 of 8, says "Treasury buys up questionable mortgage paper"

No, on the contrary, there is no question about these MBS. They are overprice and the FED wants to take these out of the market, and won't let the market price these assets. The market wants to seriously discount these assets because they are overpriced. Why are they overpriced? Well, they are overpriced, because the underlying asset (homes) are overpriced. Hence you have people's prices of homes going down, and as a result stuck with upside-down mortgages; where the value of the OUTSTANDING LOAN far outweighs what the price of the home will probably EVER BE. People are defaulting on these mortgages, simply because they can't make the new adjusted interest rate, or have realized that with the serious decline in the value of their home, that it would be unwise to hold said home because they would be stuck with OVERPAYING for their house.

The FED will OVERPAY for these MBS. The Banks will want book value for their MBS. The Fed will of course purchase them at 80 cents or 70 cents on the dollar from the Banks. Meanwhile, these MBS if left to the market to re-price them would have probably priced them at 40 cents or 50cents on the dollar, FAR LESS THAN THE FED PAID.

Box 4 of 8 says, "Banking sector's liquidity is restored...Treasury will sort out good paper from bad paper"

Well, the Banks would have dumped their risky assets to the treasury, here. This creates a Moral Hazard; in that Banks will believe that if ever bad loans or bad investment decisions are made, that it can rely on taxpayer relief in the future, instead of relying on sounder economic decision making. The act of FAILING should always be the punishment for bad business decision making; this sort of systems reward those that accurately forecast and reward both stockholder with higher profits as well as consumers with better products. i.e. keeping their savings, and checking accounts safe.

The Treasury has no way of sorting-out good paper from bad. That is why we have a market. Bad stocks, or companies that perform bad or are losing money are discounted in their "stock price". This is how good companies from bad companies are sorted. The buyers look at the books, and decide what is good and what is bad, and price accordingly. The Treasury here has no way to gauge this...

Box 5 of 8 says, "Treasury auctions triaged paper to the highest bidder"

This is where the taxpayer will eat it the most. Here the Treasury is assuming these MBS will appreciate in value. Why do they think that? If they are going to appreciate then why does the market want to discount these? Here the FED is assuming that it will buy these MBS at 70 cents on the dollar and sell it back to the same Banks or investors at $1, at $2, hell what makes them think they will be able to sell it back at 71 cents.

Will they hold these MBS for 1500 years in the hopes that someday these derivatives will be worth something....

Box 6 of 8 says, "Now the Treasury has money to repurchase T-bonds from willing sellers in the open bond market."

Don't get me wrong, sure the Treasury will get some money back for these. They'll probably buy them at 70 cents on the dollar, turn around and sell it back for maybe 40 cents or 50 cents back. Here is were we will eat the difference. The 40cents or 50cents will be used to buy back what T-bonds it can. The rest will remain-outstanding and increase the national debt or the Fed will just print-up the money presses to monetize the debt. In either case, this is not good for you and me.

Box 7 of 8 says, "If Treasury breaks even...taxpayer is untouched"

This is the most unrealistic scenario. Taxpayers are left holding the bag for this mess, because we will be buying junk at a premium and selling back junk at a discount...

Junk does not appreciate when it has been overpriced to begin with.

Box 8 of 8 says, "Back to normal functioning economy...whew"

Only if by 'functioning' the writer means that we have higher inflation, more debt, and a lower standard of living.

I'm sorry, but the person who wrote this article has zero understanding of what money does, and how markets work. This is probably the worst article I've ever read regarding, the bail-out and its ramifications.

[edit on 8-10-2008 by Gateway]