How Much Will The Government End Up Spending On The Financial Crisis?
The financial crisis which began last fall has pushed fiscal and monetary policy to the limits. Government spending has exploded over the past year to the tune of nearly $2 trillion for just the economy alone and if anything it’s been picking up speed lately.
When the Federal Reserve made it’s initial $85 billion loan to AIG it imposed a crippling interest rate which was at 8.5% above LIBOR. However in conjunction with a new $150 billion aid package to the struggling insurance giant, the Fed has announced new terms to the original agreement.
The Federal Reserve Board and the U.S. Treasury on Monday announced the restructuring of the government’s financial support to the American International Group (AIG) in order to keep the company strong and facilitate its ability to complete its restructuring process successfully. These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG’s execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers.
It makes sense, the first loan would have ensured an untimely liquidation in order to pay it down as quickly as possible and that wouldn’t help anyone. But the price tag keeps going up and up.
Banking, insurance and now the auto industry wants in. GM could very well go belly up and over a million jobs lost if it doesn’t get funding before the year is out.
There appears to be support for a bailout but nothing is ever certain, remember the $700 billion bank rescue plan failed to pass the first time around. The Treasury also doesn’t appear to be willing to use any of that money for the auto industry so any help will have to come from somewhere else.
Maybe there will be no help for the auto industry, the government is obviously willing to make tough, cold hearted choices when it has to. AIG got a loan from the Fed the same day Lehman Brothers got the cold shoulder and declared bankruptcy.
The housing market need serious fixing and huge amounts of money are going to have to be poured into Fannie Mae and Freddie Mac if that’s going to happen. Americans might also get some relief in the form of a new stimulus package before the next administration even takes office.
The new government is going to have it’s hands full coping with this financial mess and will most likely be aggressive in tackling the problem at the start and that just means more and more spending but what else can they do. This has the makings for a long economic downturn and no one knows how long it will last but one thing is certain, the longer it does, the more expensive it will be.
