My best friend is a bright, open minded and sensible conservative. Generally we are pretty much at the opposite ends of the spectrum when it comes to politics and economics. He wrote me an email this afternoon attaching a new chart showing a total exposure of the Federal Reserve System at pushing 2.5 trillion dollars. His conclusion is that we are "really screwed." The trouble is that he is partly right, and will be completely right if we stop now and do not bail out working people, create jobs, and help the States stay solvent.
What follows is my very quick summary of where I think we stand and what I think we must yet do. All this came out of my head as I wrote the reply to my friend; and I have not double checked the numbers. Some may be off a bit, but I don't think by much. But I am open to and hoping for corrections, both as to facts and sharing any disagreements with the conclusions I come to.
What I'd really like to see come out of my quick scribble is the generation of a good conversation here in OS on this subject.
This is for two reasons. I believe that if we get frightened and cynical and stop bailing out our economic mess now then we are in for a real depression, complete with deflation and distress numbers approaching those of the Great Depression.
Second, all of this money we are spending belongs to our children and their children. We are spending their legacy. And we had better do that right so that there is a payoff to our actions that exceeds the money we spend. Otherwise we leave them with our problems. I find that unconscionable.
Here's what I emailed my friend:
What the chart shows is that the Fed's so-called assets have grown to just
under 2.5 trillion dollars. But, instead of most of its assets being
strictly in guaranteed assets like Treasury bonds and other Federal
Government assets these assets are much more risky as the Fed has taken
paper back against troubled assets of private companies. Bottom line is
that these "assets" in some cases may not be worth the paper they are
written on. I have never seen any discussion of how much of those assets are likely to be worthless.
The trouble is that this whole bail out is a shell game. The Fed has
exposed 2.5 trillion. The FDIC has exposed, as I recall, about 500 billion. Almost all of the FDIC exposure is likely fairly secure since they insure individual accounts, not banks.
The Treasury has exposed 300 billion and has authority to expose
another 400 billion, total 700 billion. Most of that money will be paid
back unless the economy tanks, and the country is sold to China. But it can take a LONG time to get it all back, just like it did in the S&L bail out in the 90s.
Add that up and you have a total of 3.5 trillion of potential exposure, not counting the 25 billion already committed the auto mfgrs and the 25 billion more that they want. THEN, add another 500 to 800 billion that Obama is likely to seek in January to provide stimulus to the economy through spending on infrastructure, helping the states and creating
jobs.
Ironically, that money which has yet to be specified and needs the approval of Congress is the only money that can actually create any jobs and affect Main Street. The rest, a far vaster number, is to shore up Wall Street and the international monetary system. It will prevent the loss of some jobs in the financial sector, encourage lending and prime the pump. But it will not directly create any jobs out in the working world.
I 'm not convinced that giving Wall Street and the Banks billions on billions was the first thing we should have done. I think that the bail out of Main Street and creating jobs should have come first. But Bush would not hear of that. But the bail out of working Americans has to be done as soon as possible.
The sick thing is that by bailing out the big shots first the government has generated a growing cynicism and even a sense of fatalism in the public; plus there is a growing anger at the idea of giving any more help to anybody. But if we don't spend INTO the local and regional economies all of the stuff we did to free up credit is totally wasted. In other words, we have to spend more to make the spending we made do anything useful to the economy.
[Note: I wrote about this in my blog back on October 26. http://open.salon.com/content.php?cid=34313]
I call this whole situation a shell game because the only thing in all this that affects, and is counted in, the Budget of the US Government is the 700 billion already authorized and the stimulus package that Obama will propose when he is President.
Meanwhile the Fed exposure and the FDIC exposures are not counted in the Budget. If you think about it, the exposures of Freddie and Fannie were precisely like the off-budget exposures of the Fed and FDIC.
Because Freddie and Fannie were not true government agencies their exposure was not included in the Budget.
And, to make it even more impossible to glue together how much and how fast we are mortgaging our children's future, keep in mind that the wars in Iraq and Afghanistan are also off budget.
If you want to really get sick, remember that most of the obligations
of Social Security, Medicare and Medicaid and other entitlement programs are not expensed as liabilities in any given year when future liabilities are known but are amortized over decades, so the overall cost and obligations of most of those programs' actual cost is NEVER considered in the Budget. Why take responsibility for the debt of the future when you can ignore it today?
It is all a sham. It deceives the people into thinking that only the Budget
expenditures are important, when, in fact, in this case it is the "non" or
"off" Budget exposures and guarantees that are where we are really jeopardizing our children's and their children's legacy.
Its pathetic. But please don't treat the economic and jobs stimulating
spending the same as these off budget items. Without spending our way out of this recession it will become a depression and we will experience true deflation; and this country will revert to numbers like in the 30s. Nobody wants that.
OK everybody. Please let the discussion begin. I have only one dog in this hunt: that we have a good old fashioned discussion of this issue which will affect not only us but generations to come.
Monte
Posts
