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AIG bailout. Where did the money come from

OH. MY. GOD.

George "Tehre is no resassun" Bush! himself said it's pretty bad! :

CNN: Bush: 'We must act now'

President Bush and Treasury Secretary Henry Paulson today outlined a plan likely to cost hundreds of billions of dollars to contain the nation's widening financial crisis. "We must act now to protect our nation's economic health from serious risk," Bush said at a White House press conference. full story
 
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(And just to head off any criticisms of my interpretation of the U.S. monetary system... I am totally in favor of it for the most part. I majored in history and know the answer to the question 'how many panics/depressions were there before the Fed and how many since').

If you majored in history then you should have known that the beginning of the process creating the federal banking system as we know it started much earlier than 1913, and a lot happened between the 1860's and the first two decades of the 1900's (ever read about 'greenbacks'?) that were in motion that made the final steps in 1913 (meaning the creation of the Fed) pretty much a given since much of it was already in place in various degrees.

:p


This is why I keep my own dummies version for easy reference.
 
AIG have assets in excess of $1 trillion, so they're probably able to repay.

So, why wouldn't anyone else give them the loan? Unless of course they also had liabilities that were pretty darned high as well.

I'm no economist, although I think I am above average in getting this stuff compared to the typical American. I also haven't followed this crisis very, very, closely. Having said that, though, it seems to me that a big part of the problem is that a lot of "assets" that a lot of companies were holding were such things as anticipated values from the sale of derivatives, or mortgages that were more than the value of the houses used as collateral, or various other "assets" that were some variation on "we are sure someone will give us money real soon now."
 
On NBC News they kept saying that the government was "printing" the money for the bailout. By which I think they mean that they issued new bonds. The size of the Federal debt increased.
 
I wrote them a check. Told them to wait a couple of weeks before they cashed it.

Anyone got a couple of billion I can borrow 'til next payday?
 
If you majored in history then you should have known that the beginning of the process creating the federal banking system as we know it started much earlier than 1913...

Point taken, though I was specifically referring to the Federal Reserve System. Our national banking system goes all the way back to everyone's favorite Hal Bidlack impressionist - Alexander Hamilton.
 
Two questions. Does this plan to bail out the economy mean our government is going to get a descent amount of control over our nation's banks? And at hearing that should I be jumping for my tinfoil hat?
 
So, why wouldn't anyone else give them the loan? Unless of course they also had liabilities that were pretty darned high as well.

That's the crux of the problem. It was only a short time ago there were huge buckets of money washing around the globe looking for a home. A whole swag of companies came to look upon assets as a liability to making a profit, and were funded in their activities purely on the ready availability of short term credit. When the crises started, those buckets of money disappeared. The problem was that companies that did have reserves and in assets, still need cash to function. The expected short term loans just weren't available any more. This has led to companies that deserved to die ending up in trouble, but also companies that were more conservatively running ending up in trouble, too, even though in normal times they would have been managing quite comfortably.

AIG seems to be in the latter category.
 
Also, when the fed loans money, it doesn't actually loan money that already exists. It loans brand new money.
Yes, and it created some "negative money" for itself.

Congressional approval wasn't necessary, because the money didn't come from anywhere.
That's not the reason. As I said before, your government already approved it several decades back. The money "not coming from anywhere" does not mean that it can be created at will. The money is no more or less "from anywhere" than any other change in government outlay or or tax cut.

Also, correct me if I'm wrong, but it isn't quite true that the taxpayer is on the hook for the money, is it?
Yes it is--the taxpayer loaned out the money and if it does not come back it is the taxpayer's liability. But the Fed and the Treasury have made sure that the taxpayer has good terms (well, as good as can be reasonably got). Remember the loan attracts 8.5% over market rates and the taxpayer owns 80% of an insurance giant for free.

Let us imagine that AIG can't repay the loan. That's not hard too imagine, really. We're pretty sure that AIG can't repay the loan.
The government is pretty sure AIG *can* repay (although not repaying would now be a bit like the government defaulting to itself).

No one else will have to repay the loan, either. Right?
Wrong it would eventually have to be clawed back through tax or other government receipts.

The risk to the taxpayer isn't actually to the "taxpayer", it is to anyone who uses US dollars, because there are now 85 billion more dollars than there used to be, but since there is no more stuff, it's pretty much a sure fire inflation recipe. If they do manage to repay the loan, then dollars will be retired, which will make everyone's dollars more valuable.
Correct but the 85 bio is not going to go straight out and hit main street prices or wages.
 
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Point taken, though I was specifically referring to the Federal Reserve System. Our national banking system goes all the way back to everyone's favorite Hal Bidlack impressionist - Alexander Hamilton.

I was mostly jokin with you. Your explanation pretty much summed up the 20th century well enough.
 
The money "not coming from anywhere" does not mean that it can be created at will.

Doesn't it? They decided to create the money by loaning non-existent money from the fed to AIG. They were authorized to do so under the previously cited statute, but they had a choiceto either create it, or not create it. They chose to create it, and give it to AIG, with the promise that AIG would pay it back. How is that different from creating it at will?

The money is no more or less "from anywhere" than any other change in government outlay or or tax cut.

It seems to me it is. When the government wrote me a check for my "economic stimulus" payment, they had to draw that money from an account. Since they didn't have enough money to give me and my 300 million friends the money, they had to get it from somewhere. They sold a bunch of bonds. Now they owe the money to the bondholders.

This is different. They made some new money. They didn't sell any bonds to get the money that they gave AIG. If AIG doesn't pay it back, AIG ceases to exist, and no one owes anything to anyone.

What did I miss? How does the taxpayer end up on the hook? And if the taxpayer really is on the hook, how can that be a good idea? We have an executive branch department creating government liabilities without Congress' approval. If the previously cited law is the approval, then it would mean that Congress could authorize the executive branch to spend money as it pleases. I.e., they could pass a law that says, "The US government may give as much money as they feel like to anyone who makes mead."

Such a law would be unconstitutional. It would take a Congressional power, and give it to the executive branch. Congress can't give away its power. So, suppose, instead, they passed a law that says, "The US government may make any loan they want to any maker of mead, said loan being made in the form of taxpayer backed securities?" That law would pass constitutional muster? If this law really says what it appears to say, then they apparently did pass such a law, but it strikes me as a very, very, bad idea, and one that ought to be challenged on constitutional grounds.

I don't want the government to be able to give 85 billion dollars to a private company without a Congressional vote.

Correct but the 85 bio is not going to go straight out and hit main street prices or wages.

How could it not? Where else will it go?
 
Actually the New York Federal Reserve loaned the company that much, secured on AIG's assets and charging interest. And the US government gets 80% ownership of AIG and can veto it paying dividends to anyone else.
Actually the FRBNY didn't even lend AIG that much. That's a limit, like the limit on a credit card.

What does that mean? How can one buy money? What is used to pay for it?
Existing money. The Fed has the privilege to buy notes from the Bureau, treating them as physical products that have been manufactured. Last I heard the price of notes was something like 3% of face value.
 
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What does that mean? How can one buy money? What is used to pay for it?

Existing money. The Fed has the privilege to buy notes from the Bureau, treating them as physical products that have been manufactured. Last I heard the price of notes was something like 3% of face value.

To expand on Gaz' response, here's a .pdf from the BEP the intro of which contains this quote. I put the purchase with the wrong agency (banking institutions buy it, not the Fed. they just order it from BEP/Mint).
The Federal Reserve System (commonly referred to as the “Fed”) operates as the Nation’s central bank and comprises a Board of Governors, 12 regional Federal Reserve banks located in major financial centers, and several thousand commercial banks that are members of the system. One of the important functions of the Federal Reserve System is to ensure that adequate amounts of currency and coin are in circulation. Depository institutions, such as commercial banks, savings banks, savings and loan associations, and credit unions, buy currency from Federal Reserve banks to meet customer demand. The value of that cash is charged to their accounts and when the need for currency and coin declines, these institutions return excess cash to a Federal Reserve bank, which in turn credits the appropriate account.
Bold mine.
 
Doesn't it? They decided to create the money by loaning non-existent money from the fed to AIG. They were authorized to do so under the previously cited statute, but they had a choiceto either create it, or not create it. They chose to create it, and give it to AIG, with the promise that AIG would pay it back. How is that different from creating it at will?
Because the act limits the circumstances in which any Fed system bank can do this, that's how.

It seems to me it is. When the government wrote me a check for my "economic stimulus" payment, they had to draw that money from an account. Since they didn't have enough money to give me and my 300 million friends the money, they had to get it from somewhere. They sold a bunch of bonds. Now they owe the money to the bondholders.

This is different. They made some new money. They didn't sell any bonds to get the money that they gave AIG.
One is a loan, one is a transfer. Quite different, you agree?

If AIG doesn't pay it back, AIG ceases to exist, and no one owes anything to anyone.
As I have already said--wrong. If AIG defaults to the Fed, *then* the money will have to be raised by government borrowing or tax or the government selling assets. So I am not going to bother saying this again.

What did I miss? How does the taxpayer end up on the hook?
You seem to think money is imaginary just because "it is created out of thin air". If AIG defaults it will be your real money it has burned, I am afraid.

And if the taxpayer really is on the hook, how can that be a good idea? [ . . . ] If this law really says what it appears to say, then they apparently did pass such a law, but it strikes me as a very, very, bad idea, and one that ought to be challenged on constitutional grounds.
Challenge the constitutional aspects with greater authorities on the subject than me by all means, I am not even American. In any case, the rational, public-interest reason *why* most governments give their central banks executive powers to lend-as-last-resort is that it is wholly self-defeating to require legislatures to mull over the pros and cons in the midst of a crisis. Quite obviously the outcome of such a setup would be that Bear Stearns and AIG would go down and we would now be discovering how bad the collateral damage actually was.

I don't want the government to be able to give 85 billion dollars to a private company without a Congressional vote.
(Again, it is a *loan* not a transfer) Fair enough. But I think your misguided sense of principle would be much more threatening to taxpayers.
 
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