Explain to me: Federal Bank Bailout

[asterroc]

Oh wise LJ-friends, explain to me this Feds bailing out / buying out the banks thing. Preferably in 3 sentences or less (so as to boil it down to what's most important).

I really do appreciate y'all's ability to boil down these topics I find remarkably complex and filled with too many details for me to grasp, into simple "here's what's important about the thing, and here's what you can ignore" sort of summaries. And I've a tag for them too.

So. Fannie May, Freddie Mac (what's with the names anyway?), and AIG. Three sentences. Go!

Comments

[sirroxton.livejournal.com]

Gotta run, so I'll try to give you a handy intuition.

There's a lot of money saved in the world - about 70 trillion dollars, 7x the national debt, and 5-6x the GDP. That number has been growing astonishingly over the past several years.

Keep in mind, that is *saved* money, for things like pensions, insurance backing money, and personal bank accounts. That money has to go someplace safe.

US bonds are considered safe because the government can tax the citizenry, but bonds aren't the only safe investment. The US financial industry offers a lot of other safe financial products.

In fact, US financial products are so well loved that foreign companies are willing to sell goods cheaply just so they can take your dollars and sink them into those products.

So what happens when those "safe" investments prove not to be so safe? The demand for US financial products goes south. Foreign holders take their money out of US financial products. Now 1) Sony is less interested in your dollar because it can't buy good financial products and 2) the market is now flooded with dollars that were dumped by the financial industry, and your dollars have to compete.

Keep in mind, the flexible liquidity-injection system that allowed the Fed to react to the subprime lending crisis is based on having buyers for our bonds.

Devalued dollar, no liquidity, hell on earth.

The good news is that if we manage to avoid this purported apocalypse, the US taxpayer will actually make money on the AIG bail-out. The government is charging AIG over 11% interest. AIG has $150 billion worth of good assets, and this loan will give them 2 years to sell that off in an orderly fashion and pay back the government.