Punchinello’s Chronicles

September 22, 2010

Where Does Bailout Money Go?

You’ve probably heard that we’re bailing out banks. In fact, every time you turn around there’s another story about some amount of money going to another bank and more about “bailout” this or that. So where is all this money going? How come we don’t see it? Why is the Federal Reserve suggesting even MORE bailout money to banks? Why aren’t these banks lending any of this money that’s supposedly “fixing” their problems?

Consider another problem: Interest rates on bonds and other US Treasury securities are very low. So low that you really can’t make much money on them, even if you hold a bond for 30 years. Even so, that interest is higher than money put into savings accounts, and often higher than money in certificates of deposit (CDs). With such low interest rates to borrow money, but also to lend money, what’s going on?

The third thing to think about is that despite the world economy being miserable, and the US economy being the talk of the town, the government keeps spending money. We hear more and more about this program, that program, and “stimulus” money. Where’s all that money coming from?

The answer is that banks are financing the US government. All this bailout money that’s coming from the government, is actually going back to the Treasury. It’s passing through and being approved by the Federal Reserve, and the whole frickin’ process is a plain old circle jerk! It’s a sneaky way to print money that doesn’t have the slightest value, and an end-run around ANY kind of responsible fiscal management. Here’s how it works.

  1. Keynesian economics and modern prize-winning economists tell us that the only way to create money is through debt. So having more debt means creating money.
  2. A bond, security, certificate of deposit, Treasury bill, and other financial notes and derivatives ALL are debt obligations. The paper is a contract obliging the borrower to pay back the money to whomever owns the piece of paper.
  3. The US Treasury only can print money that’s been authorized by the Federal Reserve (the “Fed”). This Federal Reserve “bank” is the nation’s central bank. When “they” (Ben Bernanke) say it’s okay, the Treasury prints money and puts it into circulation.
  4. The Treasury can’t just give money to the Government (i.e., Congress) and politicians.
  5. Private banks, particularly those that have just been legally deemed Too Big To Fail can, and often are basically forced to purchase the ever-increasing number of bonds and other US government securities.

Let’s say you want to buy a hamburger but you don’t have enough money. You come to me and ask to borrow $10. If I know you and trust you, I may lend you the money just on your pretty face. If I don’t know you, I may lend you the money but ask you to sign and I.O.U., which is text-message-language for I Owe You. (Actually, it’s You Owe Me, but since you’re the one who signed the paper, you’re the “I” in the story.) If I really don’t know you, and I’m a banker, I’ll have you sign a contract that says you’ll pay me back the $10.

Now depending on how much money I have, how much you’re borrowing, and how risky you are, I may charge you a fee for helping you out. That fee is the interest rate. After all, I don’t want to just lend you money then get back the same amount of money, right? I want to make something on the deal. If I’m pretty sure you’ll pay me back, the fee might be low. If I’m not so sure about getting paid back, I’ll charge a higher fee.

At that point, you can go to the FHA, Faniie-Mae or Freddie-Mac and borrow gobs more money, like for a house, and pay NO fee at all! The government’s got yer back, and “they’ll” pay back the loan!

All this sounds simple and logical. So simple that we’re told it doesn’t apply to governments, corporations, banks, and financial institutions. In fact, we’re told that to even think about money this simplistically is a totally wrongheaded way of understanding money. Only “morons” would believe that a “hyoooge” economy works even remotely like what you and I might do about a McDonald’s Happy Meal.


When you have a credit card, then spend a lot of money using that credit card, you’re borrowing money from the bank that issues the card. You can either pay back all the money you borrow each month, or you can make a Minimum Monthly Payment. That minimum is usually some portion of the actual money you borrow (the principal), plus a monthly interest payment.

So too, when the US government borrows money, they too have to make monthly payments. How does the government borrow money?

Treasury bills (T-bills), federal bonds and so forth, all are ways for a large organization to borrow money. A municipal bond is a debt contract put forth by a town or city. When your town wants to build a library, the town might “issue” a bond issue totaling the cost of that library. Each bond is “worth” a portion of the overall amount. So if they library costs $1-million, the town might issue 10,000 bonds, each worth $100.

Suppose you want to buy one of these bonds for $100. Why should you “lend” the town your hard-earned money for nothing other than civic good-heartedness? Well, you might lend the hundred bucks because the town says they’ll give you back $110 over ten years. That’s $10 in interest. That’s your fee for helping out, and that’s their debt obligation to you. Not only do they promise to pay you back your $100, but they’ll give you $10 for your trouble. You, or anyone, anywhere in the world who’d like to buy one of those “muni’s” or municipal bonds.

A major reason to “invest” in municipal and government bonds is that they make money for you. Another reason is that there often are tax advantages. Many, many people invest in bonds as a large part of their retirement fund. They fully expect to get back their initial investment, then the additional interest.

Over the course of a lifetime, investing in long-term government bonds is a good way to (or used to be a good way) to store money, make that money grow, and provide for old age.

Who says that money’s going to be paid back?

If you look at dollar bills you’ll see that they’re issued by the Federal Reserve. They’re “notes.” They’re a promise to pay back whatever that dollar bill supposedly means. So too, national (sovereign) notes and bonds are backed by the word of that government. United States bonds are backed by “the full faith and credit of the United States of America.”


Each month, the Treasury holds an auction whereupon they offer some amount of debt to the world and public. Not so long ago, the monthly debt offering (bonds) was maybe around $10-billion. It’s now up around $35-billion.

Each month, the offered bonds (debt) are brought to the world market and people bid on those bonds. The price they’re bidding is the interest rate the buyers are willing to accept in return for lending the US government their money.

All well and good, and for a long time lots of people were willing to buy those bonds — lend the government money. Not so much anymore.

One of the nifty things about the monthly paper auctions has to do with two questions: 1) who buys these bonds, and 2) what happens if nobody feels like lending any money?

What’s been happening lately is that the Federal Reserve has been buying a huge amount of each month’s bond auction. Since the Fed can’t print money (only the US Treasury can actually print money), this is a way to create money without a printing press. The Fed tells the politicians it’s okay to apply for a $32-billion “loan,” this month, then the Fed buys the bonds.

More importantly, as an agreement with the very large Too Big To Fail banks, the US government will help them operate, provide them with a break on their debts, and pay a higher interest. In exchange, when nobody buys monthly debt auctions, those banks MUST purchase some amount — enough that the entire auction is a “success.”

To boil it all down to the bottom line, the reason banks are continually being bailed out is that almost ALL that bailout money is turning right around and going out the door at the monthly government debt auctions!

Decades!…of continual spending has upped our national debt (the visible one) to $13 TRILLION dollars! That means the minimum monthly payment is around $30+ BILLION dollars! There’s not a single red cent in any bank or savings account, so all the government can do is borrow that minimum monthly payment!

The entire reason the Federal Reserve was created was to act as the central bank for the United States government. All the government can do is borrow money from the bank — The Fed. However; the Federal Reserve has NO restrictions, rules or regulations or audit requirements whatsoever. The Fed is NOT required to tell anyone where they’re getting the money they’re supposedly lending the government!

The fact is, the Fed simply “says” they have money! That’s good enough for the Treasury, and the Treasury then borrows money from the Fed (as digital money in a computer). With that money, the Treasury then prints up either dollar bills or bonds and notes — debt obligations.

Retirement funds, old folks, young folks and anyone who hopes to have money in the future buy up bonds. With the stock markets being useless nowadays, more and more people are buying bonds. Even other countries are buying US bonds and notes. China is a good example, having purchased nearly $1-trillion of American debt!

Almost the entire totality of “bailout” money doesn’t exist! It’s all coming from the Federal Reserve as an “okay” to issue monthly debt auctions of over $35-BILLION. That’s each and every single month!

To make it stupidly simple, so all us “morons” can get a sense of it, consider what would happen if you had 10 credit cards, each with a $5,000 limit. If you max out all ten cards, your total initial debt would be $50,000. That’s your principal. Then you’d have monthly interest on each card. What if you can’t make your payments on each card?

You then open up another credit card, but this eleventh one you only use to borrow the total minimum monthly payment you’ll need to finance your $50,000 of maxed out cards. But then you get a pay cut! Soon, you’re using only that eleventh card to pay all your debts.

So you take out a twelfth card, and use that to help cover the minimum monthly payment on your debt. That’s what the US government is doing. The bailout money is going to the private banks in order to finance the purchase of US government bond auctions.

In other words, the government has a counterfeit money-laundering operation taking place. Each month, they force the banks to buy up bonds. That costs the banks $35-billion dollars, which they don’t have because all their loans are going belly up. They apply to the government halfway through the month to help with their problem, so the government then “lends” them (gives them) $35-billion in Bailout Money.

By the end of the month, the government then needs the banks to buy more bonds, so they ask the banks for $35-billion. The banks take the bailout money, buy the bonds, then sell them to people hoping to build a retirement account. But…where does the money the government gives back to the banks come from?

The Federal Reserve. The government borrows another $35-billion from the Fed in order to cover the bailout to the banks who need the money to buy the debt the government is creating with every new program, new stimulus project, new healthcare plan, new this, new that, and new something else.

It’s a great racket, isn’t it! At least it is until you go to redeem your bonds when you’re ready to retire. That’s what’s going on in Japan, with the aging population. Too bad, so sad….no money, honey! But hey, at least you can get food stamps, right? They just won’t buy you toilet paper! Oh…but wait! You can use American dollars as toilet paper! Same thing!



  1. […] Where Does Bailout Money Go? « Punchinello’s Chronicles […]

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