Q & A With Uncle Sam

If you ever try to reconstruct the sequence of recent financial events, and our government's reactions to them, you might very well find yourself suffering from Who's-On-First syndrome.  An imaginary conversation might help illustrate the situation more clearly.  Imagine a reasonable man, a consumer, investor and taxpayer, conversing with a representative of our government, as events unfold.

I will designate the consumer/investor/taxpayer as "Joe", and the government representative as Uncle Sam, or US.  We pick up the action on March 11, 2008.

US:      Good morning, Joe.  Ready for spring?  By the way, the Fed is kicking in an extra $200B in loans to banks and investment houses.  Not to worry, it's getting mortgage-backed securities as collateral.

Joe:      That's what the Fed does, doesn't it.  Although $200B sounds like a lot.

US:      Oh, and Bear Stearns failed.  Again, not a problem.  We're helping JP Morgan buy them out.

Joe:      How are you helping?

US:      The Fed is lending them $29B.  Small potatoes for the Fed.

Joe:      Ouch.  But the stock market's fine.  And the surge in Iraq seems to be working.  I think we'll be OK, Sam.  Keep me posted.

US:      ... We have to seize IndyMac.

Joe:      Some other bank failed?

US:      Yes.  It lost tons of money, but it is FDIC insured, so we have to make good to its depositors.  Don't worry; it's what the FDIC is for.

Joe:      How much is it going to cost?

US:      Not sure.  Billions.

Joe:      Well, I suppose we had to.  I'm glad the Fed and the FDIC are taking care of all these little brush fires.  The S&P 500 is about 1300 right now, not too shabby.  Let me know if anything goes really wrong.

US:      Good news.  We decided to make home ownership easier.  Congress passed and the President just signed a new bill that provides another $300B in loan authority for troubled homeowners.

Joe:      You're spending another $300B?

US:      Oh no, we're not spending it.  It's just a guarantee.  Since home values just about never go down, that money is PDS - pretty darn safe.

Joe:      Well, keep me posted if home values do go down, or if anything else goes wrong.

US:      ... Joe.  Umm ... home values do seem to be going down.  And, well, we had to take over Fannie Mae and Freddie Mac.

Joe:      What?!  Those guys are big.  I thought the government already ran them.  How much is this going to cost?

US:      Well, we're calling it $200B for now.  Some pessimists think it could be more.

Joe:      $200B?  That's like half the defense budget!  The S&P is still about 1250, but  I'm starting to get nervous here.

US:      ... I have some good news and bad news.

Joe:      Bad news first.

US:      The bad news is that Lehman Brothers went bankrupt.  The good news is that we're not going to bail them out.  Those rich Wall Street guys are just going to have to suffer for their own mistakes.

Joe:      Well at least I'm not paying for it.  But they're pretty big, aren't they?  The S&P is down to about 1200, or down over 10% since May.  Didn't the Bear Stearns, IndyMac and other bank problems have to do with houses or mortgages or something?  I'm getting more nervous.

US:      ... I'm afraid I have all bad news today, Joe.  AIG failed like Lehman, but this one we're going to bail out. And, um, I think we're going to have to help shore up our financial system - a tad - to help lubricate our credit system.

Joe:      And what's this going to cost me?

US:      $85B for AIG.

Joe:      And what about lubricating our credit system?

US:      Another $70B.  Sorry.  Oh, and we're guaranteeing some money markets, for up to another $50B.

Joe:      You're killing me, Sam.  This is starting to add up.  And why did you rescue AIG, IndyMac and Bear Stearns, but not Lehman?

US:      Well ... that's a tough one, Joe.  We can't rescue everyone.  But we need to keep the system going.  You know, lubricated.

Joe:      By my count, lubrication has cost me the better part of trillion dollars so far.

US:      Now don't exaggerate, Joe.  Some of that is just guarantees, not real money.

Joe:      Well the S&P is still about 1200, so maybe it'll work out.

US:      ... You're not going to like this, Joe.  We're in real trouble and it's going to take some real money to get us out of it.

Joe:      You've already spent or guaranteed about a trillion bucks just since March, and this is only September.  How much do you need?

US:      $700B.

Joe:      You've got to be @%$&ing me!  That's like ... over a third of the entire federal budget.  That's over 50 Marshall Plans.

US:      Now Joe, the Marshall Plan was 60 years ago, inflation ...

Joe:      Inflation inschmlation.  It's a lot of money, Sam!  When do you need this?

US:      Immediately.  It's extremely important that we get the money immediately.  We need to bail out troubled assets now, before the financial machinery breaks down altogether.

Joe:      Right, lubrication.  But we're in the middle of a presidential election.  Can't this wait just another few months?

US:      Nope.  This is extremely important.  We're talking ... Great Depression.  Now you wouldn't want that to happen, would you Joe?

Joe:      Of course not.  But we're talking a couple trillion bucks just from spring to fall.  And the market is starting to not like it.  We're flirting with an S&P of 1100, down 20% since May.

US:      But good news, Joe.  We got that bailout money out of Congress.  They tacked on just a little bit more, though.

Joe:      Oh jeez.  They "tacked on" to $700B?  How much did they tack on?

US:      Another $150B.

Joe:      So to get $700B worth of lubrication, I need to spend $850B?  That's more than a 20% mark-up.  My bookie only wants a 5% vig.

US:      You make it sound bad.  Look, the bailout really comes in two chunks of $350B each; we might not even need the second chunk.

Joe:      Do I have "stupid" written across my forehead, Sam?

US:      I guess I should go ahead and tell.  The Fed just made an extra $330B available to other central banks, for a new total of $620B.  And it tripled, to $225B, the amount available for short-term loans to smaller banks.  By year-end, the short-term loan program could have up to $900B in credit outstanding.  Make that $1.3 trillion.

Joe:      Whoa, whoa.  Now I'm starting to lose track.  Is this on top of the $850B bailout thingy?

US:      Yes, but this is the Fed, Joe, not the US government per se.  The Fed is independent, remember?  And most if it is just loans.  Loans get paid back.

Joe:      Look at my forehead again, Sam.  And thank you so much for an S&P around 900.  My investment losses since May are now about 35%.  It went down 23% in just the first seven business days after your wonderful bailout.  I thought it was supposed to help.  Are you sure you know what you're doing?

US:      Just think how bad it would have been without the bailout.  Oh, the Fed just said it will provide another $540B in financing to provide liquidity to money market funds.

Joe:      Liquidity, huh?  Is that kind of like lubrication?  I think I'm the one who needs the lubrication, Sam.  I lost count of all the trillions by now. 

US:      Somebody added it up as $8.5 trillion, but what do they know?  You can't just add all those numbers, Joe.  Some of it is from the Fed.  Some from FDIC.  Some of it is just loans or guarantees of loans.  And we might not even need that second chunk of $350B for troubled ssets.  In fact, we're going to let President-elect Obama decide if he thinks he'll need it.

Joe:      Let me think that over, Sam.  You mean, if Obama just sends a letter, he'll get an extra $350B that was already authorized by a Republican President?

US:      Yes, but you make it sound ridiculous.  He might not want it.

Joe:      Spare me.  Hey, you have that look on your face.  Who's bankrupt now?

US:      Iceland.  Don't worry about Iceland.  But AIG needs another $150B.  And Citigroup needs $20B.  And some other banks need a little over $30B.  We're giving them what they need, Joe.

Joe:      It sucks to be Lehman Brothers.

US:      And you were right.  President-elect Obama says he'll take that $350B.

Joe:      I'm shocked.

US:      And Joe.  That's not all he wants.

Joe:      Oh schnapps.  How much this time?

US:      Like another $700B.  Or maybe $900B.

Joe:      Got dandruff and some of it itches!  Didn't we just cough up a trillion last October?  It's not even New Years.  The S&P was just crawling back up to 900, after hitting 1000 the day before Obama won.

US:      Now don't get in a huff just yet.  This still has to get through Congress.  Congress has thought they might need $900B.  Now they're talking a mere $819B, maybe even under $800B!

Joe:      Just please stop the bleeding.  This should only about double our national debt in a single bound, and that's if everyone pays us back what we lent them.  Obama, Pelosi and Reid can spread the wealth and reward their constituents.  Fine.  I'll just lick my wounds, pick myself up, dust myself off and get back to business.  I can survive a 40% stock market loss.  A mere flesh wound.

US:      I really hate to tell you this, Joe, but we're not done.  We're going to have to restructure our entire financial system.  We're going to have to update regulations.  We're going to have a "bad bank" and a "big bang" and we're going to try things that have never been done before.

Joe:      That was all dreamed up by that guy who screwed up his own taxes by $34,000, right?  Give me the bad news.

US:      We're thinking another $500B.  Then we'll see how that goes.  And maybe another $500B after that.  We just have to see what works as we go along.

Joe:      My wallet's on the dresser, Sam.  And I'm out of lubricant.

(In writing this article, I made use of a very nice timeline at the San Francisco Chronicle.)
If you ever try to reconstruct the sequence of recent financial events, and our government's reactions to them, you might very well find yourself suffering from Who's-On-First syndrome.  An imaginary conversation might help illustrate the situation more clearly.  Imagine a reasonable man, a consumer, investor and taxpayer, conversing with a representative of our government, as events unfold.

I will designate the consumer/investor/taxpayer as "Joe", and the government representative as Uncle Sam, or US.  We pick up the action on March 11, 2008.

US:      Good morning, Joe.  Ready for spring?  By the way, the Fed is kicking in an extra $200B in loans to banks and investment houses.  Not to worry, it's getting mortgage-backed securities as collateral.

Joe:      That's what the Fed does, doesn't it.  Although $200B sounds like a lot.

US:      Oh, and Bear Stearns failed.  Again, not a problem.  We're helping JP Morgan buy them out.

Joe:      How are you helping?

US:      The Fed is lending them $29B.  Small potatoes for the Fed.

Joe:      Ouch.  But the stock market's fine.  And the surge in Iraq seems to be working.  I think we'll be OK, Sam.  Keep me posted.

US:      ... We have to seize IndyMac.

Joe:      Some other bank failed?

US:      Yes.  It lost tons of money, but it is FDIC insured, so we have to make good to its depositors.  Don't worry; it's what the FDIC is for.

Joe:      How much is it going to cost?

US:      Not sure.  Billions.

Joe:      Well, I suppose we had to.  I'm glad the Fed and the FDIC are taking care of all these little brush fires.  The S&P 500 is about 1300 right now, not too shabby.  Let me know if anything goes really wrong.

US:      Good news.  We decided to make home ownership easier.  Congress passed and the President just signed a new bill that provides another $300B in loan authority for troubled homeowners.

Joe:      You're spending another $300B?

US:      Oh no, we're not spending it.  It's just a guarantee.  Since home values just about never go down, that money is PDS - pretty darn safe.

Joe:      Well, keep me posted if home values do go down, or if anything else goes wrong.

US:      ... Joe.  Umm ... home values do seem to be going down.  And, well, we had to take over Fannie Mae and Freddie Mac.

Joe:      What?!  Those guys are big.  I thought the government already ran them.  How much is this going to cost?

US:      Well, we're calling it $200B for now.  Some pessimists think it could be more.

Joe:      $200B?  That's like half the defense budget!  The S&P is still about 1250, but  I'm starting to get nervous here.

US:      ... I have some good news and bad news.

Joe:      Bad news first.

US:      The bad news is that Lehman Brothers went bankrupt.  The good news is that we're not going to bail them out.  Those rich Wall Street guys are just going to have to suffer for their own mistakes.

Joe:      Well at least I'm not paying for it.  But they're pretty big, aren't they?  The S&P is down to about 1200, or down over 10% since May.  Didn't the Bear Stearns, IndyMac and other bank problems have to do with houses or mortgages or something?  I'm getting more nervous.

US:      ... I'm afraid I have all bad news today, Joe.  AIG failed like Lehman, but this one we're going to bail out. And, um, I think we're going to have to help shore up our financial system - a tad - to help lubricate our credit system.

Joe:      And what's this going to cost me?

US:      $85B for AIG.

Joe:      And what about lubricating our credit system?

US:      Another $70B.  Sorry.  Oh, and we're guaranteeing some money markets, for up to another $50B.

Joe:      You're killing me, Sam.  This is starting to add up.  And why did you rescue AIG, IndyMac and Bear Stearns, but not Lehman?

US:      Well ... that's a tough one, Joe.  We can't rescue everyone.  But we need to keep the system going.  You know, lubricated.

Joe:      By my count, lubrication has cost me the better part of trillion dollars so far.

US:      Now don't exaggerate, Joe.  Some of that is just guarantees, not real money.

Joe:      Well the S&P is still about 1200, so maybe it'll work out.

US:      ... You're not going to like this, Joe.  We're in real trouble and it's going to take some real money to get us out of it.

Joe:      You've already spent or guaranteed about a trillion bucks just since March, and this is only September.  How much do you need?

US:      $700B.

Joe:      You've got to be @%$&ing me!  That's like ... over a third of the entire federal budget.  That's over 50 Marshall Plans.

US:      Now Joe, the Marshall Plan was 60 years ago, inflation ...

Joe:      Inflation inschmlation.  It's a lot of money, Sam!  When do you need this?

US:      Immediately.  It's extremely important that we get the money immediately.  We need to bail out troubled assets now, before the financial machinery breaks down altogether.

Joe:      Right, lubrication.  But we're in the middle of a presidential election.  Can't this wait just another few months?

US:      Nope.  This is extremely important.  We're talking ... Great Depression.  Now you wouldn't want that to happen, would you Joe?

Joe:      Of course not.  But we're talking a couple trillion bucks just from spring to fall.  And the market is starting to not like it.  We're flirting with an S&P of 1100, down 20% since May.

US:      But good news, Joe.  We got that bailout money out of Congress.  They tacked on just a little bit more, though.

Joe:      Oh jeez.  They "tacked on" to $700B?  How much did they tack on?

US:      Another $150B.

Joe:      So to get $700B worth of lubrication, I need to spend $850B?  That's more than a 20% mark-up.  My bookie only wants a 5% vig.

US:      You make it sound bad.  Look, the bailout really comes in two chunks of $350B each; we might not even need the second chunk.

Joe:      Do I have "stupid" written across my forehead, Sam?

US:      I guess I should go ahead and tell.  The Fed just made an extra $330B available to other central banks, for a new total of $620B.  And it tripled, to $225B, the amount available for short-term loans to smaller banks.  By year-end, the short-term loan program could have up to $900B in credit outstanding.  Make that $1.3 trillion.

Joe:      Whoa, whoa.  Now I'm starting to lose track.  Is this on top of the $850B bailout thingy?

US:      Yes, but this is the Fed, Joe, not the US government per se.  The Fed is independent, remember?  And most if it is just loans.  Loans get paid back.

Joe:      Look at my forehead again, Sam.  And thank you so much for an S&P around 900.  My investment losses since May are now about 35%.  It went down 23% in just the first seven business days after your wonderful bailout.  I thought it was supposed to help.  Are you sure you know what you're doing?

US:      Just think how bad it would have been without the bailout.  Oh, the Fed just said it will provide another $540B in financing to provide liquidity to money market funds.

Joe:      Liquidity, huh?  Is that kind of like lubrication?  I think I'm the one who needs the lubrication, Sam.  I lost count of all the trillions by now. 

US:      Somebody added it up as $8.5 trillion, but what do they know?  You can't just add all those numbers, Joe.  Some of it is from the Fed.  Some from FDIC.  Some of it is just loans or guarantees of loans.  And we might not even need that second chunk of $350B for troubled ssets.  In fact, we're going to let President-elect Obama decide if he thinks he'll need it.

Joe:      Let me think that over, Sam.  You mean, if Obama just sends a letter, he'll get an extra $350B that was already authorized by a Republican President?

US:      Yes, but you make it sound ridiculous.  He might not want it.

Joe:      Spare me.  Hey, you have that look on your face.  Who's bankrupt now?

US:      Iceland.  Don't worry about Iceland.  But AIG needs another $150B.  And Citigroup needs $20B.  And some other banks need a little over $30B.  We're giving them what they need, Joe.

Joe:      It sucks to be Lehman Brothers.

US:      And you were right.  President-elect Obama says he'll take that $350B.

Joe:      I'm shocked.

US:      And Joe.  That's not all he wants.

Joe:      Oh schnapps.  How much this time?

US:      Like another $700B.  Or maybe $900B.

Joe:      Got dandruff and some of it itches!  Didn't we just cough up a trillion last October?  It's not even New Years.  The S&P was just crawling back up to 900, after hitting 1000 the day before Obama won.

US:      Now don't get in a huff just yet.  This still has to get through Congress.  Congress has thought they might need $900B.  Now they're talking a mere $819B, maybe even under $800B!

Joe:      Just please stop the bleeding.  This should only about double our national debt in a single bound, and that's if everyone pays us back what we lent them.  Obama, Pelosi and Reid can spread the wealth and reward their constituents.  Fine.  I'll just lick my wounds, pick myself up, dust myself off and get back to business.  I can survive a 40% stock market loss.  A mere flesh wound.

US:      I really hate to tell you this, Joe, but we're not done.  We're going to have to restructure our entire financial system.  We're going to have to update regulations.  We're going to have a "bad bank" and a "big bang" and we're going to try things that have never been done before.

Joe:      That was all dreamed up by that guy who screwed up his own taxes by $34,000, right?  Give me the bad news.

US:      We're thinking another $500B.  Then we'll see how that goes.  And maybe another $500B after that.  We just have to see what works as we go along.

Joe:      My wallet's on the dresser, Sam.  And I'm out of lubricant.

(In writing this article, I made use of a very nice timeline at the San Francisco Chronicle.)