$8 trillion question — will bailouts help me?

John W. Schoen Senior producer • Profile • E-mail

A trillion here, a trillion there. The pile of cash the government is throwing at bailouts is starting to add up. More than one reader would like to know: Are we ever going to see that money again?

It is my understanding that our federal government will be pouring billions of U.S. taxpayer money into banks, automobile businesses, etc.. Each time I read remarks from our respective senators/congressmen, they say that the taxpayers must be repaid. Certainly, my taxes will be going up regardless of this stimulus package, but now with billions of more dollars about to be used to bolster the economy, they will be increasing more. In what manner will they repay me? Would it be a decrease in future tax rates or will the government find a way to spend this return on some social program/investment that may or may not benefit me?
— Todd R., Pennsylvania

That really is the $8 trillion question.

As the financial markets and the economy have fallen apart, that's roughly how much money the federal government has committed to loans, asset purchases, investments and guarantees to shore up the battered financial system. In theory, the government should get most of it back. But the return on these investments is going to vary great deal — depending on outcomes that are very difficult to predict.

Take the case of the Federal Reserve’s $29 billion in financing to help JPMorgan Chase take over Bear Stearns in the spring, one of the Fed’s first big moves to buy up the bad assets that have been clogging the credit markets. A lot of the assets purchased by the Fed are bonds backed by mortgages that are defaulting; one reason the market for these bonds is broken is that no one can predict how many more mortgages are going to default.

The Fed has been pretty tight-lipped about just what assets it’s buying; the only public record is a line on its balance sheet for “Maiden Lane LLC,” the entity it created to hold the Bear Stearns assets. The idea was to sell these off as the market recovered and recoup the $29 billion.

Since July, this account has fallen from $29 billion to $27 billion. That could mean the Fed has sold some of those assets, or it could mean the Fed has lost $2 billion so far on these holdings.

The same is true for hundreds of billions of dollars in other assets the Fed has snapped up to get money flowing more smoothly through the financial system. Keep in mind that the dollars the Fed is using are not tax dollars; it swaps its own Federal Reserve Notes (aka “cash”) for these assets. That flood of cash has pushed short-term interest rates to near zero.

When the financial system recovers and the economy gets back on its feet, the Fed will sell those assets back into the financial system, soaking up wads of cash in return. Draining that cash will be critical to preventing another surge in inflation. But if the Fed drains too soon or too quickly, the economy could take another dive.

The other main source of bailout cash is the U.S. Treasury, which raises the money by collecting taxes and borrowing in the securities market. So far the amount of tax money spent on the financial bailout has been a bit smaller than the amount committed by the Fed. The list includes the $168 billion in tax rebates and other spending this summer to get the economy moving again. That money’s been spent; there are no provisions to take it back.

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Congress also has agreed to spend up to $700 billion to bail out the nation's financial system.  The Treasury insists that the $300 billion or so handed out so far is an investment, because the Treasury got stock in return for the funds it has handed out. If that stock goes up in value, taxpayers could be in the black. If not, those are tax dollars you won’t see again.

Congress also has insisted that the auto companies pay back any federal loans they might get, although prospects for an auto industry bailout were highly uncertain at last check.

As for how you'll see the return on this bailout money, the cash came from the Treasury and that’s where it would return. Where the money is spent — or whether taxes go up or down — is, as always, up to Congress and the White House.

If all goes well, you'll see an even bigger return. Getting the $13 trillion U.S. economy growing again will pay big dividends. The longer it takes to do that, the more financial pain we're all going to feel.

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