How would taxpayers "profit" from the bailout scheme?

Hi, I’m hoping someone with economics knowledge will help me out here. I’ve been reading about the bank bailout plan with interest, since I believe that the government is giving our hard-earned money to greedy banks which have failed in their duties. And, to add insult to injury, it’s happening after the same government refused even the minimal amounts of cash to help citizens with bare-minimum needs such as food programs, allowing uninsured people to access medical care, etc. etc. etc., instead choosing to throw our money away at a misguided “war”. These views notwithstanding, I admit that I am a rank amateur in understanding economics, having devoted much of my intellect to studying the arts and human behavior instead.

So, I read an article this morning where Pelosi said the plan “…gives taxpayers an ownership stake and profit-making opportunities with participating companies; puts taxpayers first in line to recover assets if a participating company fails; (and) guarantees taxpayers are repaid in full – if other protections have not actually produced a profit”. So, is this doublespeak of some sort, like that the government, not individual taxpayers, will actually get profits if the bailout pans out into a positive balance? Or does it mean only taxpayers who own stocks or homes? Surely knowing the good old USA, it does not mean that the actual taxpayers - all of them - would share in any bounty that might be recovered.

Of course, it’s my hope that the above quote means that every working person in this country would get an equal share of the potential profits that might come in. However, since I’ve lived in the USA all of my life, I fully realize that the statement is most likely some form of lie, and that even if massive profits are received, they will be funneled to those who are already rich anyway, or people who will throw the money at some stupid war, profiteering contractors, etc. etc. and not use it to help citizens in general.

Help me out here. How, exactly, would taxpayers “recover assets”? And when she says “taxpayers”, whom exactly does she mean?

It depends on how bad the consequences would be. It sucks to have to pay billions to save bail out some companies that dug themselves into a hole. But it would suck much worse to have the general economy collapse.

As for actual profits, they’re probably not going to happen. In theory, the whole situation could turn around so much that the currently worthless assets of the companies we’re bailing out might regain some value. But realistically it’s just a loss.

Most of the companies out there are having a cash-flow problem. They can almost certainly survive the crisis, but they need cash to cover their own debts so they don’t declare bankruptcy. In theory, the feds will make long-term loans or buy into the companies’ equity (that is, buy stock). Then they can get the cash off of dividends or the interest on the loans.

I have to nitpick here, but this statement is factually wrong. The government has spent quite a bit in these areas. More than half of the 2007 Federal Budget went to various social programs- Social Security, Medicare/Medicaid, Unemployment & Welfare benefits, and so on. http://en.wikipedia.org/wiki/United_States_federal_budget,_2007#Total_spending

Another thought is this: Think of how many thousands upon thousands of average, working people these companies employ. If they go under, all these people are suddenly unemployed. (I am one of them. I work for a subsidiary of AIG) If they are unemployed, they cannot pay their bills or make purchases. This will effect many other businesses. More people become unemployed, etc. etc. etc. It would have long-reaching effect on the country.

The Democrats in Congress have been heavily pushing the notion that the government would receive an ownership stake in any of the companies that accept bailout money. The White House has called this a deal breaker. We’ll see which way this falls out in the final bill.

In any case, the current form of the bill being discussed guarantees backing for a set amount of mortgages that are now risky. Forget that $700 billion number. It’s meaningless. The real number is much smaller. The idea behind the bill is to keep the real number as small as possible.

The problem is that no one is quite sure what mortgages have the greatest risk, and what those and the others are actually worth. The assumption is that if they all get dumped immediately they’re worth nothing. If the companies behind them can be stabilized, time will give them a true value and they can be sold off for that. If the government purchases these obligations at less than that value, the government can actually make money on parts of the deal. The money goes to the government’s general fund, which is why people say it benefits the taxpayers. No individual will get a check from this money. It’s just that further tax revenues won’t be needed.

If the government gets an ownership stake, then potentially more money can be returned since the government will sell these stakes and reap all the money that they are worth.

It’s all theoretical for now since we don’t know the final bill, we don’t know what exactly is in the basket of mortgages, we don’t know the future economy, and we don’t know how long it will take to clear things out. All that can be hoped is that this action lives up to its claims and keeps matters from getting much, much worth.

In addition, propping up the stock market does not just help fat-cat CEOs. Lots of mature people planned ahead, saved their money for retirement, socked it away into 401K and IRA accounts so they would not be living off the public dole in their senior years and could enjoy the last few years of their lives. I am one of them. I have lost $30,000 this year. The account is in a reasonable, moderate and conservative investment fund. I’ve heard of some people whose ENTIRE retirement savings were lost. Remember this next time somebody talks about “privatizing” social security.

What I think they are saying is that, over time, any return on this ‘investment’ would go back into the General Fund. I may be wrong, however.
Here is what Sweden did, when a similar thing happened there:

(my emphasis) From here.

Something like that doesn’t sound too bad. Not having read the particulars of the U.S. ‘bailout scheme’, I don’t know if it’s anything like that. I hope it is.

Thanks everyone for your replies. I appreciate the insights into how the system as a whole works, and realize also that “taxpayers” must be code for the government’s general fund. I guess I’m a little bitter and still getting used to the idea that no matter whom I vote for, the United States government will never even come close to representing me and my priorities. :frowning:

And, Iamametalrobot, my statement was never meant to be factual, not unless you define “minimum” and “minimal” in this context, in the same way that I do, which obviously is not the case. It’s nice that the government devotes some of its budget to helping its citizens to survive, but based on US government statistics, they are not providing a minimal amount of assistance on my terms, defined as every citizen having basic health care, a roof over our heads, and adequate amounts of food. Despite the expenditures you mentioned (which are indeed, very nice and all), this is not occurring. I personally give thousands of my own dollars to the US government every year in taxes, always in hopes that this means a minimum amount of care will be provided for all citizens, but instead of this, money is diverted into killing people in other places of the world while significant portions of our own populace suffer.

The CDC points out that 43.6 million US citizens do not have any health insurance: http://www.cdc.gov/Features/Uninsured/,
the USDA mentions that 10.9% of US households experienced at least some food insecurity (defined as reduced quality, variety, or desirability of diet, and/or disrupted eating patterns and reduced food intake, ie. hunger) in 2006http://www.ers.usda.gov/Briefing/FoodSecurity/,
and homeless statistics compiled by HUD (and summarized by MSNBC) state that approximately 744,000 individuals were homeless in the US in 2005 http://www.msnbc.msn.com/id/16564208/.

Sorry about using a news summary for the homeless statistics, it’s just that direct government statistics were on .pdf files or buried in the middle of lengthy articles for which I would have had to provide directions on where to scroll for the relevant numbers.

That’s my soapbox, and now you have it: what I said was factually true. Apologies for the initial lack of context.

My son sent me this today. Kind of funny serious:

I’m against the $85,000,000,000.00 bailout of AIG & the Wall Street Crooks!

Instead, I’m in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.

To make the math simple, let’s assume there are 200,000,000 bonafide U.S. Citizens 18+.

Our population is about 301,000,000 +/- counting every man, woman and child.

So 200,000,000 might be a fair stab at adults 18 and up.

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a “We Deserve It Dividend”.

Of course, it would NOT be tax free. So let’s assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife would have $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage – housing crisis solved.

Repay college loans – what a great boost to new grads!

Put away money for college – it’ll be there!

Save in a bank – create money to loan to entrepreneurs.

Buy a new car – create jobs!

Invest in the market – capital drives growth!

Pay for your parent’s medical insurance – health care improves!

Enable Deadbeat Dads to come clean – or else!!!

Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other
company that is cutting back.

And of course, for those serving in our Armed Forces.

If we’re going to re-distribute wealth let’s really do it…instead of trickling out a puny $1000.00 ( “vote buy” ) economic incentive that
is being proposed by one of our candidates for President.

If we’re going to do an $85 billion bailout, let’s bail out every adult U S Citizen 18+!

As for AIG – liquidate it.

Sell off its parts.

Let American General go back to being American General.

Sell off the real estate.

Let the private sector bargain hunters cut it up and clean it up.

Here’s my rationale. We deserve it and AIG doesn’t!!!

Sure it’s a crazy idea that can “never work.”

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion “We Deserve It Dividend” more than I do the geniuses at AIG
or in Washington DC .

And remember, The Family plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh…I feel so much better getting that off my chest.

Kindest personal regards, A Creative Guy & Citizen of the Republic!

Umm, maybe some of that money should be put into math education.

I suppose that the word “billion” means different things to different people, but here in the USA it means 1,000,000,000

The odd thing is that it gives the figure correctly as $85,000,000,000 in the first line. They seem to be referring to a US billion rather than a British billion throughout.

Just think of what you could do with $425! All our economic problems would be solved!

Of vcourse, even if you could give that much cah to everyone, it would mean massive inflation.

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson

The bigger issue is real estate prices. A substantial portion of the economy has become based on a real estate bubble - the idea that the value of real estate will generally increase indefinitely. It’s now starting to become evident that this is not true.

Ironically, in order to avert the present crisis, the government is trying to restore stability to the real estate market. In other words, to rebuild the bubble. It’ll probably work in the short run but in the long run, it’s like the Dutch government trying to restore stability in the tulip market. At some point, the economy is going to need a much more fundamental adjustment to reality.

:smack: I should have done the math.:smack:

It would be OK if the figure was 85 trillion… I am going to tell my son to take a math course.:slight_smile:

I don’t think this is true. I think the issue is bank liquidity, i.e. the ability for them to make loans.

Property always goes up if demand for it continues to rise. However, like any industry, property also has cycles. It’s all about location…

Real estate prices were definitely a main issue with the collapse of Fannie Mae and Freddie Mac. I suspect if was also a factor with other recent business failures - corporations have long been buying real estate as a safe investment. If your company had real estate holdings valued at $50,000,000 a year ago and their current market value has dropped to $30,000,000, your company lost $20,000,000 in assets over the course of a year.

Obviously. But there’s no reason to assume that the demand for real estate will always be rising.

So… why are people getting all worked up over a measly eight five dollars? And why did you use so many decimal indicators? :confused:

I would add “consistently” to the end of this sentence.

The real estate market rises and falls like the stock market. What was the DOW (or the equivalent) at the Great Depression, like 800? It’s over 10,000 now. The guy I bought my rental property from in Southern California bought his after a huge depression of local prices at something like $95,000. He made more than 100%. Prices have declined in that area, but people are still selling for far more than what I paid for it. Yes, inflation plays a factor. However, do understand that the real estate market does not act like a real asset until it is sold. In the meantime, it’s just rent (or in my case, a shelter to ride out the housing bubble and collapse). Smart people have a HELOC open immediately, if they have to borrow against equity. Even in the middle of nowhere red state USA, those property prices are much more than 20 years ago. One can always find a price deflation if one scrutinizes enough.