Everybody and their brother has an opinion on this one, so I figured I’d weigh in.
It’s probably needed, but I have no idea if the current approach is the proper way to handle it.
Basically the major lending institutions are in a pickle right now. They’re holding a lot of mortgages of questionable value, and because nobody’s really sure what they’re worth nobody wants to buy them up.
So, in comes the Federal government. I’m still not sure what the plan is there. I hear a lot of “our tax dollars shouldn’t pay for this” from people but it’s my understanding that they’re simply authorizing the Federal Reserve to inject money into M3 and then dolling it out to the institutions that need liquid assets. I could be wrong on this one, but I doubt it. There’s no way the Federal government can come up with $700 billion out of thin air. The Federal Reserve has to increase the money supply. The Federal Reserve is a private corporation, so they wouldn’t be hip to the plan if there weren’t a possibility of profit in there for them.
Yes, we’re going to get hit with an “inflation tax” when the Federal Reserve increases the money supply, but the beauty of that [sarcasm alert] is that they’re no longer publishing exactly how much money is in circulation so nobody knows the full impact of a $700 billion injection! See this link for a graph showing the growth of the money supply in terms of US currency. The reporting of M3 stopped back in 2005 and given the trend in that chart we’re probably at around $13 trillion right now.
So, doing some rough math in my head, we’re looking at about a 5.5% increase in the money supply if we do this $700 billion bailout deal. Not exactly cool, but that’s not horrible in terms of inflation compared to some of the disasters we’ve seen in the last century. It’s manageable.
Now, why would I support bailing out the idiots that pretty much created this mess?
Simple: The US economy can’t function if we don’t have easily available credit for business owners. Period. End of story.
You’ve probably been paid by your employer at some point via credit. Heck, in some situations every single paycheck you get might be on credit. If you’re working for a company that can get a 10% profit margin on every dollar spent while sucking off a 6% operating line your employer is going to eat the credit line up to grow the business.
And they’re going to fall back on that credit if they have a tight month, quarter, or even a whole year.
If the credit line dries up my employer, and every previous employer of mine, is probably screwed. That means no paycheck for Mr. Justin Buist which means a mortgage that currently has a 0.5% chance of going into default just jumped to a 50% chance. That’s bad any way you slice it for the economy. There will be a cascading effect there that we just don’t want to deal with.
So, we have to do something to make sure that credit is still available in this country. I don’t think that is up for debate. The question is only a matter of what we should do.
Now, this problem has been apparent for years. Anybody that should have seen this coming did, but nobody did anything to stave it off. Because of that I’m not real keen on enacting an immediate fix-all plan of majestic proportions. I’m also not going to point any fingers based on party lines because the problem has been brewing long enough for both the share the blame. Democrats might have started the party, but Republicans have been controlling the government long enough to fix the problem, when the warning signs were right freaking there, but failed to do so.
All I know is that something might need to be done, and anybody entering the discussion with “my tax dollars” should probably be punched in the throat to shut them up. Unfortunately that’s about 80% of the population which makes discourse on the matter rather difficult.
