Where did all the bailout money go?
The government has pledged $11.3 trillion for economic rescue – and has spent one-quarter of that. On what?
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Is the rescue plan working?Skip to next paragraph
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One good sign is that the financial system hasn't experienced a meltdown. That was a real fear in September, when the US witnessed the financial equivalent of the Three Mile Island nuclear alert.
After that panic, the bailouts ramped up in earnest. The Bush administration and Congress fashioned an emergency response – the $700 billion TARP, or Troubled Asset Relief Program.
Key credit indicators have improved since then. Mortgage rates are down, for example.
"That strategy is working," he says, "despite all of the weeping and gnashing of teeth over that TARP."
Many economists are hopeful that the worst of the crisis is in the rearview mirror. But the economy and the financial sector remain fragile.
Will more money be needed? Where?
More money will probably end up going to some folks who are already big recipients. The Treasury wants to make sure big banks have adequate capital to make loans.
If the recession deepens, the political pressures could tug two ways. More firms could be in trouble and claim that they are "systemically significant," in the Treasury's phrase. But the Treasury might run into limits on the number of bailouts that Congress is able or willing to fund.
Is the U.S. government going broke?
Not yet. The US still enjoys a AAA credit rating, but some economists worry that may not last. The big danger, they say, is that bailout costs are adding to the national debt just before a big rise in entitlement spending for new baby-boomer retirees. The Obama administration knows that if a fiscal course correction doesn't emerge in the next few years, foreign lenders could worry about inflation risks. That could hurt the dollar and push up Treasury borrowing costs.
What are the government's alternatives?
The most widely advocated one is for regulators to take over insolvent banks and fix them in the cheapest way possible. In many cases, shareholders would be wiped out, bondholders would be asked to swap their debt for equity, and the firm could return quickly to private ownership.
If those changes wouldn't be enough to make a bank solvent, the government might strip out bad assets and manage them separately, while creating a "clean bank" to be sold to private owners.
Both conservative and liberal critics of the Obama plan advocate such an approach or alternative plans.
"Make no mistake, we are selling off our future and the future of our children to prevent the bondholders of US financial corporations from taking losses," mutual-fund manager and economist John Hussman wrote last month. "We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own."
How can such a mess be avoided in the future?
Policymakers are busy trying to craft a new regulatory structure. One issue under review is how to tie bankers' pay to risk management, not just profitability.
Another is whether to prevent financial firms from getting so large that regulators consider them "too big to fail."
Some say the largest firms should pay new insurance fees to cover the high bailout costs they can impose in a crisis.
What they get, and what you get
These firms have received large direct loans or investments from the US government.
AIG $128.5 billion
Freddie Mac 45.6 billion
Citigroup* 45 billion
Bank of America* 45 billion
JPMorgan Chase 25 billion
Wells Fargo 25 billion
Fannie Mae 16.2 billion
General Motors 13.4 billion
Goldman Sachs 10 billion
Morgan Stanley 10 billion
*Not including loss-limit insurance on assets
Sources: US Treasury, Federal Reserve
Here's some of what's in the economic rescue plan for individual Americans' home loans, bank accounts, and jobs.
• Your deposits at an FDIC-insured bank or savings association are fully insured up to $250,000 through Dec. 31, rather than the usual $100,000. The guarantee covers checking, NOW, savings accounts, money market deposit accounts, and certificates of deposit.
• You may be able to buy a home with federal help or get a tax credit of up to $8,000 this year if you’re a first-time buyer.
• You may be able to reduce your mortgage costs by refinancing a loan owned or backed by Fannie Mae or Freddie Mac, even if the loan balance is 80 to 105 percent of your home’s value.
• If you're defaulting on your mortgage, you may avoid foreclosure by getting a loan modification, with government-provided incentives. See www.makinghomeaffordable.gov for details.
• All federal rescue programs are intended to minimize job losses and keep credit available for Americans.
– Mark Trumbull