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  November 26, 2008

Bailout costs $8.5 trillion


US Federal Government has pledged $8.56 trillion in economic bailout for financial institutions so far
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biography

Nomi Prins is a journalist and Senior Fellow at Demos. She writes about politics, money and relationships. Nomi is the author of Other People’s Money: The Corporate Mugging of America and Jacked: How "Conservatives" are Picking your Pocket . Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London.


precis

With the credit crisis continuing to worsen, the US federal government is pledging a seemingly endless amount of money to shore up failing institutions hit hard by toxic assets. Federal government pledges now top $8 trillion with the most recent $800 billion announced Tuesday. The Real News Network spoke to journalist and author Nomi Prins.


transcript

Bailout costs $8.5 trillionWhy I support the REAL News

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PHYLLIS BENNIS, FELLOW, INSTITUTE FOR POLICY STUDIES: What we see in the United States is American-driven news that's shaped around American foreign policy and takes the vantage point of US interests at its core. What we really need is a real, independent, international media outlet.

Bailout costs $8.5 trillion

Producer: Carlo Basilone

CARLO BASILONE, TRNN: The US government announced another $800 billion injection on Tuesday in the hopes of bolstering the frozen credit markets and the devastated housing markets. Treasury Secretary Henry Paulson announced $200 billion to unfreeze credit for various types of consumer debt. As well, the Federal Reserve will provide $600 billion in funding for new mortgages to help stimulate the US housing market. These recent pledges by the federal government are in addition to the $7.76 trillion already pledged, as tallied in a recent Bloomberg report. The breakdown does include Monday's $306 billion for Citigroup's bad assets. It also goes back to last March, when the government committed $29 billion to entice JPMorgan Chase to take over the failing Bear Stearns, as well as the more than $150 billion to AIG. The controversial $700 billion Wall Street bailout for the Troubled Asset Relief Program, or TARP, that was passed by Congress in early October is also part of the Bloomberg calculation, though it's not even 10 percent of the total. According to the Bloomberg report, the FDIC has pledged $1.4 trillion in bank-to-bank loan guarantees. The government also pledged $2.4 trillion to buy up so-called short-term notes, or commercial paper, which are unsecured promissory notes, or IOUs, from banks and corporations. And, finally, $2.3 trillion in something called the Commercial Paper Funding Facility and Money Market Investor Funding Facility. The $800 billion announced Tuesday and the $7.76 trillion from the Bloomberg estimate add up to $8.56 trillion, or $26,500 for every man, woman, and child in the United States. We spoke to journalist and author Nomi Prins about where these trillions might come from.

NOMI PRINS, AUTHOR: Well, that's the now-many-trillions-of-dollars-worth question. It's coming from two sources, both of which ultimately get back to us, the taxpayer. The first source is the Fed works as a kind of lender of last resort. That is part of their job. And when they lend money to financial institutions, they have taken collateral in return, which used to be US Treasury bonds. What we have now and what has been created over the last year, and particularly in high volume in the last few months, is the collateral that the Fed has on its books has changed from secure Treasury bonds to who knows what junky types of mortgage and subprime-backed collateral. Now, we don't know exactly what it is, because they don't have to disclose exactly what it is. This means that they have collateral that they might not necessarily be getting interest payments on. So they're not giving those to the Treasury Department, meaning there is a shortfall of money coming into the Treasury Department, meaning the Treasury will have to print more money or, basically, increase our debt, raise more money in the form of Treasury bonds, in order to fund not just everything else the Treasury has been doing in this bailout, but also the shortfall that is coming from the Fed changing their method of receiving collateral from the banking system.

BASILONE: Because the Federal Reserve is not disclosing what types of bonds they are using for collateral, Bloomberg has taken the unprecedented move of suing the Fed under the Freedom of Information Act to force disclosure.

PRINS: All of that comes back to us, because if more debt needs to be raised, that means that the US as a country, if it wants to stay solvent with respect to other nations who also own our debt, have to make those interest payments. The more debt we have, the more interest payments we have to make, and, therefore, the more money comes off of the federal budget before anything else happens. Already it's the third largest line item in the budget, the interest on our debt. It will become bigger, and it is necessary to pay in order to maintain our national solvency. In the end, even though the numbers are really astronomical and in the trillions to date, the simple infusions of capital or lending of it in return for toxic acid will not in itself work, unless it's done to the amount of potential loss that is in the system, which we're all unclear on, because a lot of the leverage on a lot of these assets was not fully disclosed and is not, still, transparent and is not, still, being announced by the various financial institutions. They're still holding onto this knowledge. And so, until that is gone, although this is a tremendous sum of money and it will have ramifications for years in terms of the national debt and what doesn't get used to finance other federal budget items, it is, unfortunately, not really going to fix anything until the losses are all shaken out of the system, and we're just not there yet.

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