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Where do they find the money?

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niemand
Contributor
Guys, these have been very interesting times indeed and now the US Gov is taking over the bad assets on various balance sheets. How does this work? How will the US fund these assets? are they just printing money? Thanks
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14 REPLIES 14
Not applicable
They don't even bother printing it anymore - its just electronic "bits and bytes" - so US debt increases by another couple of trillion - so what - they say they expect to be repaid "in due course"!!!!!! and the confidence in fresh air is renewed - sorry to sound so cynical, but thats exactly what it is. Central Banks have created (allowed) the credit splurge and bubble in the first place so its easy to fix (just move it off balance sheet!)
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Not applicable
They are issuing new bonds to finance some or all of the "bailout". So they are borrowing from whichever idiots will buy these bonds. Apparently the US national debt exceeds the sum of the net worth of all Americans, i.e. the country is bankrupt. The Fed is doing worse than what Lehman Brothers ever did, only people are still buying their debt. At some point it must all come crashing down... I just wish I could say when - I remember reading a book that made just this prediction, back in the days of George Bush snr.
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louisg
Super Contributor
Timato if you were in Bernanke's position what would YOU do in this crisis?
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Robbie
Regular Contributor
Agree with Thor. Why would they bother printing money - most transactions are electronic. To create more money, it's as simple as pressing the buttons + "Enter". This is how "smart" the Federal Reserve is. The question is not IF this artificial system will backfire, but WHEN it will crash !
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Not applicable
In case anyone is interested in all the Financial K..k flying around at the moment, then a bit of useless background info may help: The website below gives the CURRENT USA National Debt --- http://www.treasurydirect.gov/NP/BPDLogin?application=np --- USA NATIONAL DEBT US$400 billion in 1972 --- US$1.25 trillion in 1982 --- US$9 trillion in 2005 --- Every dollar created by the FED (or its subsidiaries / agents!) is an instrument of debt lent out at interest. The extra money required to pay back the interest can only come from one place, that being the central bank. As such, the central banks must continuously increase the money supply. PRINT PRINT PRINT (or electronically ENTER ENTER) ---- Dollars in circulation - money supply --- 1960 - approx US$20Bn ---- 1961 2008 - approx US$800Bn---- Very Very Very nice little business for Uncle Ben at the FED !!!---- And just in case you thought this scenario was not fair, remember: The Federal Reserve is not "owned" by the USA government. The Federal Reserve is owned by private national banks and other private entities set up in 1914 under the Federal Reserve Act.-------- Who owns the Fed ? - depends who you want to believe: ------ This website shows a bit of a conspiracy theory about the ownership!!!--- http://www.save-a-patriot.org/files/view/whofed.html ----- The FED's website gives a more truthful answer ---- http://federalreserve.gov/generalinfo/faq/faqfrs.htm#5---------------------- Have Fun ---------Economics 1 and Bubble Theory in the next lesson !!!
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Not applicable
I forgot of course - with Fannie Mae and Freddie Mac, its another US$5trillion aded making it $14trillion owed by the American taxpayer - Oh! and we haven't taken account of the latest bundle of bailout announced today by Mr Paulson and Georgie Bush and Ben (in answer to a journalist's question he said the cost would be "hundreds of Billions!!!) - who knows US$20trillion by year end !!!! Sorry I never knew there were 52 states in Zimbabwe
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Not applicable
First define the crisis: some companies will have a value below zero if their and their peers' stock prices decline significantly. This means that their value derives from investing in themselves or their peers. Another term for such a company is a "pyramid scheme". One the crisis has been defined as such, the solution is obvious: Let those companies become bankrupt and prosecute the managers (like Enron). As long as the companies are not bankrupt, they are just sucking money out of the economy. Once the company has been placed into receivership, consider whether any of the stakeholders need assistance. Shareholders willingly invested in a dud company, so they get nothing. Bondholders might perhaps be the beneficiaries of a class-action suit against the managers, auditors and ratings agencies involved. Finally, revisit the regulations regarding what must and must not appear on balance sheets and profit-and-loss statements. Oh, and revisit that silly regulation that says that in America, you can walk away from your home and default on your bond with no consequences. Sure, if you just leave the market, there will be a lot of pain as the pyramid schemes pull each other down all within the space of a few weeks. But then it would be over. The real banks (businesses that act as honest brokers between those with money to invest, and those who want to borrow, at a reasonable margin) will survive, and we would be able to invest in them with confidence, knowing that they are sound. These government "bailouts" are just prolonging the pain and creating uncertainty.
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Not applicable
Gideon Gono does not occupy top spot on my list of "The world's worst central bankers" anymore...
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louisg
Super Contributor
I reckon these bailouts were implemented to AVOID panic amongst bank depositors. If everyone and his dog withdraws their cash from the banks to put under their mattresses there is a huge risk that that could lead to systematic risk. NOBODY wants or can afford the fallout of such a scenario. I think all the central banks had/have no choice but to add liquidity to the market. A lesson from the 1929 crash was that the powers that be at the time decided to drain out the liquidity from the market when they should have ADDED liquidity to the market. Many businesses go into liquidation not because there is anything fundamentally wrong with them but because of cashflow problems. If these fundamentally sound businesses are given a loan(liquidity) to ride out the short term storm they can often survive and prosper(and pay back the loan). I agree that it is absolutely insane to allow someone to walk away scott-free from a mortgage that he no longer can afford. We can now see the consequences of this folly. The law surely has to change.
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Not applicable
If I'm in a small business and I have cash flow problems, no-one will bail me out. I'll go bankrupt. Why should the rules be different for larger companies? Also, your assertion that all of the companies are fundamentally sound is flawed. The market for credit default swaps rose from nothing in $0.6 trillion in 2000 to $46 trillion in the first half of 2007, without a corresponding increase in collateral to back them. Buffett called these credit default swaps a time-bomb as far back as 2003. The executives in question simply accelerated these practices, for personal gain. Some of the companies also list equity in their peers and partners as assets, and gains in the value of this stock as income. Hence increases in stock valuations appear to boost income, encouraging investors to boost valuations further. Many of these companies are no better than Enron. In 2001, we had thousands of .coms with questionable business models. Most of them went bankrupt. The Fed (quite rightly) did not bail them out. Some of them had good business models, and prospered, in spite of the turmoil, like Google and Amazon. The Internet is a better place because of the 2001 shake-up. Now a similar shake-up is needed in the Western financial system. Too much money has been invested in companies that do little more than push paper money between each other. Good banks will survive this and profit in its wake.
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niemand
Contributor
And still the value of the $ hasn't dropped significantly. I wonder why? There is something very fishy about this whole thing. This is such quality fodder for the conspiracy buffs. Thanks.
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louisg
Super Contributor
The rules are different for the BANKS because of the threat of SYSTEMIC RISK (that's just the it is/has to be). I did not even imply that all of the companies are fundamentally sound. I'm suggesting that in certain cases, liquidity can help solve some problems. NO economy can afford to jeopardies their banking system. If part of the solution is to add liquidity to the market then so be it. PREVENTION is certainly BETTER than CURE, but that is not the case the world economy finds itself in. I agree that it should be SURVIVAL OF THE FITTEST (that is the cornerstone of capitalism) BUT sometimes its necessary to assist the less fit so that the FITTEST do survive. There is sure to be a lot of regulation on it's way because of this mess. But for now they have to ensure the cogs keep turning. Litigation against those responsible will hopefully follow.
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Bangbielie
Contributor
Bob Mugabe has some spare notes he can donate.
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Wizard
Super Contributor
If u thought that the dollar was the best thing under the sun for 100 years, you wouldn't dump them all at ones! It takes time...
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