2008 November 24 Monday
US Federal Government To Provide $7.76 Trillion In Funds

The debt guarantees, loans, preferred stock buys, and commercial paper purchases are really adding up. Get your mind around the enormity of what's happening in banking as a result of the financial crisis.

Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

That's a staggering number. What I want to know: Can the Fed inflate the money supply far enough to turn the price deflation into an inflation?

You hear a lot about the US Treasury's TARP program. But the Federal Reseve has lent more than 3 times the amount of money the US Treasury has provided.

Wall Street analysts, congressional overseers and the media have parsed every detail of the Treasury Department's financial rescue program -- $250 billion and counting.

Largely outside public view, however, the Federal Reserve is lending far more than that amount -- $893 billion, roughly the equivalent of the annual economic output of Mexico -- to help a wide range of institutions weather the economic storm.

As of last week, the Fed's loans included $507 billion to banks, $50 billion to investment firms, $70 billion for money market mutual funds, and $266 billion to companies that use a form of short-term debt called commercial paper. It is considering a new program that would make billions more available to prop up consumer lending: auto loans, credit cards and the like.

The changes away from previous trends at the macroeconomic level are breathtaking. The mortgage-backed securities (MBS) market has collapsed. Any mortgage lending can only be done by financial institutions that have enough money on deposit to fund new mortgage loans.

But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.

It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

Housing prices were inflated and need to fall further until ratios of housing prices to incomes and other housing price indicators fall closer toward historical trend lines. The collapse of the MBS market helps to drive that needed correction.

In the face of a rapidly contracting economy and falling prices the new Presidential Administration is looking to do a big spend to prop up the economy.

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years.

So far all the efforts to put Humpty Dumpty back together again are not working. Goldman Sachs expects the economy to start contracting at a 5% annual rate.

Last week, Goldman Sachs said it expects the economy to shrink even faster by the end of the year, at a 5 percent annualized rate. Meanwhile, the Dow Jones industrial average dropped 5.3 percent for the week; and the nation's largest bank, Citigroup, sought government assistance to avoid collapse.

Obama's economic stimulus probably isn't going to help. He'd do more good if he cut taxes in half and then the Fed bought up all the T-bills needed to finance the tax cut.

Share |      By Randall Parker at 2008 November 24 09:41 PM  Economics Credit

m said at November 25, 2008 4:37 AM:

I thought Robert Rubin was at Citigroup. How could it have went so wrong?

Rubin was formerly of Goldman-Sachs when they made all those loans to Mexico that Bush the Elder bailed out...................that guy is expensive that Rubin. Maybe he should be in a debtors prison and not the administration.

I cannot believe there are those who OPPOSE 25 BILLION for three auto manufacturers BUT WANT 1 DAMNED TRILLION for banks and other lenders. Talk about hypocrites.

Why cant we just use foreign banks and brokerages? We buy foreign cars, RIGHT EVERYBODY? Whats good for the goose is good for the gander.

The blinding arrogance of our over-leveraged financial elite staggers the mind and defies description. They are the biggest welfare cheats in the history of humanity. A business that lends money and packages up loans to be bought as dividend paying instruments....................and they turn it into massive white elephants that go belly up in the span of 15 years from the mid-nineties, and want us all to bail them out with our tax money for decades to come. This is much bigger than the Savings and Loan scandal of the 1980's.

The Bible sure was right about one thing: The borrower is servant to the lender.
We borrow from China and Japan. They can start buying up our assets at any time. If our stock market gets back down to seven thousand or six thousand, what is to stop them from buying huge shares of the good companies and institutions we have left?

The only thing buying America on the world stage is those 12,000 nukes, the Air Force, and Navy. If we didn't have that massive military the Reagan and Bush the Elder built up................so much of what we do and get away with would blow up in our faces.

JSBolton said at November 25, 2008 7:46 AM:

I wonder if they will try to dynamite the credit logjam by changing capital requirements, looser in proportion as a bank expands its loan volume.

Engineer-Poet said at November 25, 2008 8:07 AM:

Aren't there only about 100 million taxpayers in the USA?  $7.76 trillion is almost $80,000 in new debt apiece.

This cannot be borne.  The debt will either be discharged in bankruptcy or inflated away.

kurt9 said at November 25, 2008 8:32 AM:

Once the economy recovers (say 5-7 years from now), the government can start to pay off that accumulated debt by selling off assets. The Federal government owns something like $40 Trillion in assets (they own 85% of Arizona and Nevada, for example). It is the gradual sell off of these assets in good economic times when asset values are high that the government can pay off its debt.

averros said at November 28, 2008 5:27 AM:

kurt9 -- those assets aren't really valuable. 85% of Arizona and Nevada owned by the feds are useless desert with some military bases thrown in - probably contaminated as hell (judging by previous experiences of reclaiming the land formerly owned by the military). The $40T figure is a complete B.S. - just like most of the government statistics.

US of A is broke, period. It is only a matter of time when this will become impossible to ignore.

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