Breaking Down How The Bailout Money Was SUPPOSED To Work

Everyone has said bad things about how the $700 in bailout money to the banks has been a flop. Many think that is has been poorly allocated and on top of it, hasn’t been kept track of. People are real “hush-hush” as to where the initial $350 billion dollars have gone.

It begs the question then of why can’t we part with just a mere $17 billion for the auto industry? It was shot down in the Senate, but the President “didn’t want the auto industry to fail on his watch,” can the White House save the big 3?

Where Have All The Benjamin’s Gone?

According to The US Treasury the money has been finding homes so far in locations such as:
$250 billion to buy senior preferred shares and warrants in banks and thrifts.
The latest equity purchases brought the total of investments made so far to $162 billion. A further $10 billion is approved for Merrill Lynch but has been deferred pending its merger with Bank of America.
$40 billion investment in troubled insurer American International Group (AIG.N), which has been completed.
$20 billion
investment in Citigroup (C.N) pledged as part of a bailout announced on November 23.
$13.4 billion to prop up General Motors Corp (GM.N) and Chrysler LLC. The Treasury has said GM could qualify for a further $4 billion in March, which would have to come from the final $350 billion tranche of the financial rescue fund.
$5 billion pledged to cover potential losses on a portfolio of Citigroup mortgage-related assets.
$20 billion pledged to cover potential losses for a Federal Reserve program aimed at improving consumer access to credit.

Why Didn’t We Just Dump $17B Into The Auto Bailout Then?

The answer to that lies in the fact that the auto industry doesn’t have as much to offer the government as the banks do.  Yea, I may just be short-sighting it, but when you run the numbers, the US Government isn’t getting much out of it.  Would YOU lend money to a business that may or may not be able to pay you back?

The auto-industry is in some trouble with where their directions are headed.  Never before in the history of the USA has such an issue carried so much weight.  Energy consumption is at the top of EVERYONE’S agenda right now and unfortunately the auto-industry is at the spearhead of that agenda.  They are the biggest eater of energy and everyone owns a part of it.  It’s too bad I think, but a necessary step to start changing what we’re doing now.

Yes, in comparison to the $700 billion dollar bailout of the banks, it is a drop in the bucket, but the economics behind it is the big thing. The US Treasury is getting money back (yes, devaluing the dollar, but pushing the spending of money) when they loan big chunks of change to the banks as the banks in turn will “in theory” lend that money to the Joe Plumbers of the nation and money will circulate as per the system.

The problem now is that nothing is moving.  The banks won’t loan to anyone without a pristine record.  Those that are looking for money are going under.  The banks are getting that money back in land or businesses, but can’t then move THAT piece to anyone without a pristine record.  It’s somewhat of a vicious cycle.

Ben Bernanke’s idea is that pumping the banks full of this $$$ is going to ease the bank’s concerns about lending the less-than-pristine borrowers to get money back in circulation.

Here’s an interesting video describing it if you’re more of a visual learner:

Quantitative easing from Marketplace on Vimeo.

Filed Under: financial education