The Federal Reserves $200 Billion Non-Bailout
The Federal Reserve this week unleashed a $200 billion non bailout initiative. They are essentially allowing investors to take mortgage backed securities and swap them for US treasuries.
The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.
You might think of it like a collateral swap. Say your teenager has an old beater of a car. Maybe they bought it from a junk yard for $800 and fixed it up with $200 in labor and 2 months of elbow grease and amazingly the car runs and even passed inspection so that it can be licensed and insured.
Your teenager then comes to you and tells you that they need $4000 in cash for some un-related purpose. You agree to loan them the money and accept the title to their junker car as collateral. Now, unfortunately for you, you have 10 other teenagers in need of money too (maybe you adopted or something). You can’t keep making collateral loans on junker cars. So you take your loan document and you swap it out with the Feds for a loan document from the US government on US treasuries.
Your teenager now has to repay the government and the government has to repay you. Odds are (theoretically) that the government will be able to pay you back in dollars with less risk than your teenager.
Sound too good to be true?
Well, it is kind of. The risk here is that the when the US government pays you back, they pay you in dollars. If you are watching the currency market lately, the dollar is rapidly approaching the point where it will be worthless. Don’t believe me, then let me know how many gallons of gas you can buy with a dollar today and how many gallons you will be able to buy with a dollar paid back to you by the treasury when ever they actually pay you. I’m guessing that unless the government doesn’t fix its finances with something akin to a massive financial colon cleanseing process, you will be better off burning those dollars than trying to exchange them for gasoline to burn in your own car.
