Bailout economics 101

Pub date September 30, 2008
WriterTim Redmond
SectionPolitics Blog

Dennis Kucinch, who voted against the bailout, has a remarkable basic lesson on how the bailout would have worked. In a letter to his supporters, he writes:

Here is a very quick explanation of the $700 billion bailout within the context of the mechanics of our monetary and banking system:

The taxpayers loan money to the banks. But the taxpayers do not have the money. So we have to borrow it from the banks to give it back to the banks. But the banks do not have the money to loan to the government. So they create it into existence (through a mechanism called fractional reserve) and then loan it to us, at interest, so we can then give it back to them.

Confused?

This is the system. This is the standard mechanism used to expand the money supply on a daily basis not a special one designed only for the “$700 billion” transaction. People will explain this to you in many different ways, but this is what it comes down to.

The banks needed Congress’ approval. Of course in this topsy turvy world, it is the banks which set the terms of the money they are borrowing from the taxpayers. And what do we get for this transaction? Long term debt enslavement of our country. We get to pay back to the banks trillions of dollars ($700 billion with compounded interest) and the banks give us their bad debt which they cull from everywhere in the world.

Who could turn down a deal like this? I did.

Actually, Kucinich is pretty close. The point he misses is that much of the money won’t be borrowed from banks but from other countries, primarily China, that have a surplus of cash and want to invest in the U.S. But the sentiment is right.