How US Bail Outs Work ?

The US federal government’s massive effort to save the financial system carries a price tag that has soared into the trillions.

Where does the money come from?

Technically, it comes from the federal Treasury. But there’s a problem. Even before the current financial crisis erupted, the U.S. was spending hundreds of billions more than it was collecting, leaving a budget deficit of nearly $400 billion dollars. So to pay for all the additional financial commitments the government has taken on in recent months, the Treasury has had to borrow hundreds of billions more. To do that, it has been selling bonds on the global bond market.

How exactly does that work?

Once a week, the US Treasury Department, working through a syndicate of banks, conducts auctions for bonds—which come due in anywhere from 30 days to 30 years. The Treasury deposits the proceeds of the bond sales to its account at the Federal Reserve Bank of New York. Then the government turns around and lends the bond revenues to Citigroup, AIG, and the other bailout recipients. It’s this process that people refer to when they say the Treasury is “printing money,’’ because the funds are essentially created out of nothing. Everything is done electronically


Who’s lending us all this money?

To a large extent, the rest of the world—especially China, which as of September owned $585 billion in Treasury bonds. The next largest foreign creditors are Japan, with holdings of $573 billion, and Great Britain, with $338 billion. Foreign oil-producing countries own $182 billion of Treasury debt.

Are there risks?

Yes. All that borrowing by the government, coupled with all the loans that the U.S., in turn, is extending to corporations and consumers, dramatically increases the world’s supply of dollars. With so much currency in circulation, there’s the risk of inflation, which is what happens when too much money chases too few goods.

Source: www.theweek.com