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Where is the government getting all the money?

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tlwmkw

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Many of you here have given good explanations about our nations current credit crisis so I thought perhaps someone could explain this to me.

My question is this: If there is a liquidity crisis and no one is lending money then where is the government getting the cash for the bailout from? They keep telling us that there is a huge deficit and that it is growing so that means the government is still borrowing money from someone- Who? Why is money easily available to the gov if no one is lending?

I find this whole thing very scary because the gov keeps spending far more money that they collect in tax revenue. How can this continue? It wouldn't work for me if I kept on doing this (spending far above my income)- eventually no one would lend me money just like the banks that are failing due to lending to folks who couldn't afford the houses. Will the same thing happen to Uncle Sam? Will our government end up defaulting on the loan and then the US will belong to China or India? I just don't get it. If anyone can explain this please help me out.
 

Big Matt

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US Governement gets money by selling Treasuries, issuing bonds, or printing money and producing coins.

The first two increase our national debt while the second will further devalue the dollar.
 

nightnurse613

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Don't worry (???!!??) the Feds have been putting this kind of money in the market long before this EMERGENCY. :eek: How can I be out of money, I still have checks??:banana:
 

Floridaski

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Printing Money = Inflation

I am not an Economics professor - but I do recall the basic concepts from Econ 101.

Printing more money + loss of value = Inflation

Pretty scary......We are leaning toward investments that are things you can touch or see and not just something on paper.
 

John37130

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National Debt

There's a National Debt Clock at: http://www.brillig.com/debt_clock/

I checked the amount that it increased in one minute -- it increased by $2,177,391.47.

John

PS: Your portion of the debt increased by $10.29 today! Well, actually it's much more than that because all of those people with the subprime mortgages... they won't be repaying their portion of the national debt so you will be repaying their portion, too.
 

Icarus

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Part of the law that was signed increases the debt ceiling so we have the $700B to use to buy up mortgages. That basically means the US issues more bonds and we have to pay more interest each year until those bonds can be retired.

Part of the problem is what price do we pay for those mortgages? If we pay too little for them, the banks still have a capitalization problem. If we pay too much for them, it's a bailout and the taxpayers are left with the debt.

What happens to those mortgages once we buy them? Several things might happen. We might renegotiate the terms with the homeowners that have the ability to pay. But for those that don't have the ability to pay, they will still be foreclosed and the government will have to unload the properties. No matter which way it goes, we should be able to recoup a good portion of the money that we spend when buying up those mortgages. However, we'll still have a lot of costs, such as the cost of managing the assets, buying the assets and eventually disposing of the assets, and for any assets that we pay too much for, the loss of value of that asset.

The idea is to set a market value for mortgages again, and restart the credit markets and help the banks recapitalize themselves. This is only the beginning. In order to get back to anything normal, the housing markets need to stabilize, and we're still a long way off from that.

We still have to deal with derivatives including CDOs and interest rate swaps, and we need some form of regulation in that market. That will take time to unwind all those positions and create a regulated market for those derivative securities, if they can manage to do that. This is part of what the "bailout" law doesn't address and it will take time do that and it's a big question mark now. The hope is that by restarting the market for mortgages and credit, there will be some value for these securities that nobody wants to touch right now.

Right now, even states can't issue short term bonds. There's just no buyers out there for them.

-David
 
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Big Matt

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Although I agree with this, I think that in reality there will be much less accumulation of mortgage assets by the Wall Street broker/dealer community in the short and intermediate term due to the liquidity problems with the market. My guess is that you'll see more basic hedge strategies during this period.

I believe that the proliferation of derivatives gave portfolio managers a false sense of security during the lead up to this mess. The one risk nobody managed (and very few models accounted for) was the decline in the value of the assets (home prices). Of course some of this was caused by the markets themselves when the buyers artificially moved the prices up to unsustainabile levels.

We still have to deal with derivatives including CDOs and interest rate swaps, and we need some form of regulation in that market. That will take time to unwind all those positions and create a regulated market for those derivative securities, if they can manage to do that. This is part of what the "bailout" law doesn't address and it will take time do that and it's a big question mark now. The hope is that by restarting the market for mortgages and credit, there will be some value for these securities that nobody wants to touch right now.
-David
 

Kal

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The whole idea that the government can somehow maximize revenue from those distressed mortgages (and derivative packages) is far from credible. A well run business highly qualified in managing real estate transactions might very well make a profit or at least protect the underlying values. However, the US government will add on layers upon layers of "management" to a highly paid but largely unqualified staff who will try to do the work. Thow in an extremely high salary burden of benefits, health care, holidays, retirement, etc and any possible return evaporates irrespective of the underlying value of the properties. Ultimately, the whole process will be outsourced where any meaningful return will go to the government contractor.

The real money will be made by cherry-picking property packages and selling those to the investment community. Savy investors are licking their chops to get some of those packages before any thought of them going to the US government.
 

Tia

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No doubt true and very sad. Foreign markets are tanking this am according to the news also there were warning signs that were ignored several years ago on this mess, so there will be investigations into fraud. None of which will help us now.

......The real money will be made by cherry-picking property packages and selling those to the investment community. Savy investors are licking their chops to get some of those packages before any thought of them going to the US government.
 

applegirl

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We still have to deal with derivatives including CDOs and interest rate swaps, and we need some form of regulation in that market. -David
I wonder who's going to regulate this whole process/mess?

Thanks again Icarus for some explanation. I too benefitted from your explanation of how we got to where we are in the first place. You did a great job of describing the steps without getting political and we all appreciated that!


Janna
 

pianodinosaur

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The money is going to come from all of us. The people who will regulate this mess are the same bunch who created it. :ignore:
 

DeniseM

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This is about one post away from getting political - don't go there!
 

Pietin

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Maybe with inflation the value of my TS will go up on the resale market! LOL
 

Kola

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This is not political

IMHO, this discussion is rather premature because the core of the Treasury plan – a reverse-auction mechanism to acquire troubled assets from some financial institutions – will not function until next month at the earliest.

Treasury officials are developing criteria for the hiring of several large asset management groups that will be charged with managing the portfolio of assets purchased by the government.

Priority purchases by the Treasury will be securities backed by home mortgages. Untill we know the scope and the terms of such purchases we can only speculate about the impact. The Treasury also has the power to purchase other assets if necessary. And that is a BIG "IF".

Let's revisit the subject in November.

K.
 

DG001

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Here is what I don't get - how will this bailout help credit moving again for the frozen credit markets?

I understand that the theory is once these toxic assets are off the balance sheet of the banks they will be "free" to lend again... but would they?

As I see it - the banks that will be alive to tell about it would still "protect" themselves by not making lending decisions that might have made previously - there is nothing in the bailout plan that says once they "sell" these assets they have to reinvest the money in expanding businesses or in lending to home buyers - just how much will this move unfreeze the credit markets? (And wasn't that the raison de etre for all this anyways?)
 

Wonka

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The market answers

With the market down about 750 today at 3:30, it appears you're not the only one with these questions.
 
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