AIG bailout. Where did the money come from

Meadmaker

Unregistered
Meadmaker
Joined
Apr 27, 2004
Messages
29,033
So, this week, the government spent 85 billion bucks to prevent AIG from collapsing.

Ignoring for the moment whether or not this was a good idea, how could they do it legally? Congress holds the power of the purse. Surely the Treasure Department isn't authorized to write a blank check for 85 billion without Congressional approval, is it? Where did the money come from, and who authorized it?
 
Southwind17 said:
Money from the future to spend now. Sounds great. How exactly does that work then?
Click to expand...

Apparently, doing so gives you clout.
BankAmericard
 
Meadmaker said:
So, this week, the government spent 85 billion bucks to prevent AIG from collapsing.
Click to expand...
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.

Ignoring for the moment whether or not this was a good idea, how could they do it legally? Congress holds the power of the purse. Surely the Treasure Department isn't authorized to write a blank check for 85 billion without Congressional approval, is it? Where did the money come from, and who authorized it?
Click to expand...
As above is it not a "blank cheque", and it doesn't need Congressional approval because they already did that when the Federal Reserve Act was passed (Section 13-3).

ETA: And where it comes from is thin air. It is a credit and a debit of $85 billion, but since the debit is to the NY Federal Reserve Bank's balance sheet, it is an $85 bio increase in money supply.
UnrepentantSinner said:
Not to be too flippant, but from the future... as in the taxes we'll all be paying when we get there.
Click to expand...
The money is at risk (to the taxpayer) but said taxpayer could end up making a profit, having bought the company for free. If it ends up being a loss, then the US will eventually have to issue more public debt.

Southwind17 said:
Money from the future to spend now. Sounds great. How exactly does that work then?
Click to expand...
http://en.wikipedia.org/wiki/Government_debt
 
Last edited:
Southwind17 said:
Sorry - doesn't help. Dummies' Guide please.
Click to expand...

The Reserve Bank sells bonds to investors. A bond is simply a promise to pay x dollars in y years time.

When they have raised the dollars, they give it to the Treasury who, in theory, will use taxes to pay back the x dollars in y years time.

Of course, in y years time they may just sell some new bonds to get the money to repay the first bonds.

This is the highly simplified version.
 
It is almost exactly like a bank loan.

If you buy a house with a bank loan, you are spending money today that you will not earn until tomorrow.
 
Southwind17 said:
Sorry - doesn't help. Dummies' Guide please.
Click to expand...

Imagine having really nice credit and plenty of credit cards, but you work at a McDonalds mopping floors. Now imagine spending through your credit cards to pay for things, even when you don't have anywhere near the money to pay off the credit.

Kind of like that, except with more bureaucracy and it's not actually the government who has to pay the debt-- it's the people who elected them in.
 
Southwind17 said:
Money from the future to spend now. Sounds great. How exactly does that work then?
Click to expand...

You just shove paying for it off on people after you retire, be you a politician or a taxpayer.

The young can't vote, yet, if they're even born. And by the time they can, it's not your problem anymore.

Memes build up to soothe the egos of those involved, that it's going for Good Things We Really Need, yet the mathematics and the tit-for-tat (spending for votes) would both quickly land both parties in jail, and deservedly so, in any other industry.
 
gtc said:
It is almost exactly like a bank loan.

If you buy a house with a bank loan, you are spending money today that you will not earn until tomorrow.
Click to expand...

And, unlike private citizens or industry, government doesn't need collateral, since they are in the unique position that they can back their loans with the legal ability to tax. That's so solid a backing that they actually generally get the best rates.
 
Meadmaker said:
So, this week, the government spent 85 billion bucks to prevent AIG from collapsing.
Click to expand...



Peanuts... :

Bailout will cost 'hundreds of billions'

Treasury Secretary Henry Paulson today sketched the outlines of a bold approach to confront the nation's financial crisis. "We're talking hundreds of billions" of dollars, he said. Paulson said he would work through the weekend with congressional leaders to reach agreement on a plan that would address the root problems of the crisis. developing story
Click to expand...
 
Personally, I think the whole financial collapse is a conspiracy, engineered by George Bush and the NWO. They plan to release a movie blaming the whole thing on Bin Laden selling Lehmann stock short in order to bring down the great Satan. This will distract attention from the REAL TRUTH, which is that the whole thing was engineered by aliens from the 22nd century in order to corner the market on Iraqi Oil.
 
Southwind17 said:
Money from the future to spend now. Sounds great. How exactly does that work then?
Click to expand...

Southwind, sorry for forgetting you weren't American - in which case you'd have a 10% chance of having some familiarity with our Federal Reserve system and not recognizing that you deserved a sincere response like Francesca gave you. :(

To distill the above links and responses down... in 1913 we created a central banking system much like those in other nations (though ours is different because it's regionalized and under the auspices of Congress and the President). The Bureau of Engraving and Printing and the U.S. Mint make bills and coins which are sold to the Fed at a certain price and they make those hard assets availible to banks (and other lending institutions) which are then availible to businesses and citizens via deposits and loans.

In the early 70s our money was no longer backed by precious metals which allowed for fractional banking the growth of debt and things we take for granted today like electronic funds transfer. Except for the periodic withdrawl of two $20s about every two weeks or when I go on vacation and chose to carry $2-500, I never use/carry paper or coin money. Everything else is paper check or EFT.

The difference between me and what the Fed is doing in this situation is that I'm using debit system and the U.S. government/Fed is using a credit system. That $40 is out of money I have earned already. That $600 billion bailout is money that does, theoretically, not exist yet except as printed paper, non-precious metal coinage and entries on accounting spreadsheets.

(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').
 
Beerina said:
And, unlike private citizens or industry, government doesn't need collateral, since they are in the unique position that they can back their loans with the legal ability to tax. That's so solid a backing that they actually generally get the best rates.
Click to expand...
You just put your finger on how the Rothschild banking family made a fortune in the 19th century, issuing bonds to governments, among other things.
AIG bailout. Where did the money come from?
Click to expand...
A printing press. (Based on US's nice post, perhaps a digital printing press. :) )
DR
 
Last edited:
Francesca R said:
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.
Click to expand...

I think I get it. It seems like the law says that the Federal Reserve can loan money to anyone it wants to, provided they first determine that the people they want to loan the money to couldn't possibly get a loan from anyone else.

Also, when the fed loans money, it doesn't actually loan money that already exists. It loans brand new money. So, the fed basically printed 85 billion dollars and gave it to AIG, and said, "Please give us this back some day. If you don't, we'll sell your company" Congressional approval wasn't necessary, because the money didn't come from anywhere.

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? 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. No one else will have to repay the loan, either. Right? 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.
 
Meadmaker said:
We're pretty sure that AIG can't repay the loan.
Click to expand...

AIG have assets in excess of $1 trillion, so they're probably able to repay. They weren't bankrupt, they just had a rather severe liquidity problem. If they do happen to fold, the Treasury should be top of the list for dosh when those assets are realised.

(Or at least, this is my understanding, no doubt someone will correct me if I'm wrong)
 
Last edited:
You must log in or register to reply here.

Back
Top Bottom