So Who’s Really Bailing Out The Financial Industry?
I started writing this post on Sunday but never got a chance to finish it. (On the other hand my first 3 days of the UCLA MBA program have been AWESOME!) I know there’s been a lot of commotion in the stock market over the past few days and the Government just announced a bail-out of insurance company AIG. (But between spending 12 hours at school and reading 40 pages of papers a night, its been impossible to keep up). So anyway, here’s my delayed posting – its still relevant.
Last week the government announced a bailout of Fannie Mae and Freddie Mac. The US taxpayer now owns 79.9% of the outstanding shares. Before you go around congratulating them on their outstanding stock picking skills, just remember that the government is now explicitly backing the mortgages held by the two institutions.
While certain government officials have said that the bailout will end up costing the taxpayer as much as $300 Billion, the actual figures could be as high as $1 Trillion. When you consider that several major banks, the FDIC (Federal Deposit Insurance Corporation) and the PBGC (Pension Benefit Guaranty Corporation) will all need to be bailed out at some point, the official cost to the US tax payer will probably be well over a $1 Trillion.
Where is the government going to get this kind of money? Our national debt is already running at $9.68 Trillion and we have future debt obligation of another $45 Trillion.
Will the government raise taxes or just print more money to cover this shortfall?
Raising taxes is never a popular thing to do and most politicians try to avoid it if they can. The easiest thing to do is just print more money! However, this has the effect of devaluing the existing dollars in circulation. This typically leads to more inflation. Someone even said that inflation was like taxation without representation!
Basically, the average US tax payer is on the hook for all these bailouts. It will come at the cost of higher taxation, or higher inflation. Both will lead to a somewhat lower standard of living than we’ve been used to for the past two generations!
Despite the severe correction in gold and silver prices, this instability in the currency should cause their prices to jump.Even gold and silver stocks, which have been massively punished, should do well in the long term and are currently great buys right now.
If you found this post helpful, consider donating to my coffee fund!![[del.icio.us]](http://images.del.icio.us/static/img/delicious.small.gif){kind=small}
- Is the US Bankrupt? According to the USA TODAY, dated 6/1/07, The federal government recorded a $1.3 trillion loss last year - far more than the official $248 billion deficit - when corporate-style accounting standards are used, a USA TODAY analysis shows.The loss reflects a continued deterioration in the finances of Social Security and......
- Venezuela Devalues Its Currency Here's an interesting article by Dominic Frisby about Venezuela's devaluation, the effect on a country's currency and the relation with gold prices. Gold bugs are forever telling you to buy gold because it is 'nobody else's liability'. It's become one of those hackneyed phrases that has almost lost its meaning.......
- Deleveraging Is Not Deflation! I read a very interesting article on called De-leveraging is Not Deflation. Here's a partial extract: "Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But......
Related Websites
- Tax Me More! (We Need a Guilt Tax) I don't know about you, but I'm getting tired of hearing "the rich" whine about not paying enough in taxes. I've seen stories and heard interviews along these lines steadily increase year after year for the past few years now. Warren Buffett, Bill Gates, and many Hollywood types often claim......
- Personal Finance Lessons Learned the Hard Way Today is the first anniversary of the Tough Money Love blog. I am honored by those who read what I have to say and thankful for all of your comments. Your input is always educational and, at times, quite entertaining. I hope that you can say the same about my......
- Building Wealth When the Economy is Slow Just because the economy in our nation is going through a little bit of turmoil, that does not mean that we have to be all doom and gloom about the world. Don't watch the news if you can't stomach the headlines. Why should you get pulled into all the negativity......
[All content is copyright of Living Off Dividends & Passive Income]
September 18th, 2008 at 7:51 pm
You can’t count the amount the Fed and Treasury lent or invested and say that’s a cost to the taxpayer. Fact is we don’t yet know whether these government investments will result in losses or profits. It is the return on the investments that will be the cost or the profit to the taxpayer. And there are precedents for the government making money on such deals. Even in the worst case the cost would be far below the total invested.
September 27th, 2008 at 3:00 am
[...] really bailing out the [...]