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More Bailout Borrowing To Come–But Who Will Do the Lending?

November 10th, 2008 . by economistmom

Brand new story on this morning, on more aid to AIG (emphasis added):

The federal government will invest $40 billion directly into American International Group as part of an expanded bailout plan announced early this morning as the insurance giant disclosed massive losses over the last three months.

The new $150 billion effort to prop up AIG was crafted after officials recognized that an original bid to help the company was in fact weighing down the insurance giant by requiring quick repayment and a high interest rate on government loans…

The enhanced bailout plannearly double the original $85 billion loan extended to the company in September — comes with restrictions on how much AIG corporate executives get paid…

The new plan [for] AIG may make it more likely that the Treasury will have to ask Congress for more funds if the financial system continues to suffer and other companies near collapse. The $40 billion stock purchase will be paid for out of a $100 billion fund set aside under the TARP to react to crises like the one that hit AIG. With much of that fund now committed, one Treasury officials said of any future problems, “we can hope they would be few and far between.”

Well, isn’t that reassuring…

And from the front page of the print edition of today’s Washington Post, in the “you know it’s bad when” camp (which includes Marty Feldstein calling for more government infrastructure spending), we learn that Chinawhich Warren Buffett affectionately labeled “Thriftsville” in the movie I.O.U.S.A.–is apparently now pursuing more than half a trillion dollars in fiscal stimulus (emphasis added):

China on Sunday night announced an aggressive $586 billion economic stimulus package, the largest in the country’s history, at a time when it is struggling with increasing social unrest due to factory closings and rising unemployment.

In a wide-ranging plan that economists are comparing to the New Deal, the government said it would ease credit restrictions, expand social welfare services and launch an infrastructure spending program that would include the construction of new railways, roads and airports…

President Hu Jintao is expected to join other world leaders in Washington on Saturday to discuss joint efforts at preventing a deep and prolonged global recession. China’s leaders have been saying for months that the best way China can help is to keep its own economy on track.

The stimulus funds, to be used through 2010, represent roughly 15 percent of China’s yearly GDP. China last year accounted for 27 percent of global growth, more than any other nation.

The head of China’s central bank, Zhou Xiaochuan, said at the Brazil meeting that by increasing domestic consumption, China could help international markets.

So the question on my mind is:  if “Thriftsville” is going to stop saving so much and start consuming more, then who will keep investing in U.S. Treasuries–i.e., lending money to “Squanderville”?

2 Responses to “More Bailout Borrowing To Come–But Who Will Do the Lending?”

  1. comment number 1 by: Jason

    The AIG bailout means nothing to the Fed. The Fed is transparent in that it is subject to the oversight of
    Congress. Is twice a year not fast enough? The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. Legislation requires that the Federal Reserve reports annually on its activities to the Speaker of the House of Representatives.

  2. comment number 2 by: B Davis

    So the question on my mind is: if “Thriftsville” is going to stop saving so much and start consuming more, then who will keep investing in U.S. Treasuries–i.e., lending money to “Squanderville”?

    That’s a good question. I recall looking at worker to retiree ratios several years ago and noticing that they were projected to drop sharply for all major countries, developed and developing. It’s long seemed that some other countries are taking a much more rational approach and saving in preparation for their growing ratio of retirees. That includes Japan and China, the two largest foreign holders of Treasury securities. When it comes to a choice between investing in Treasury securities and spending on necessities for their own populations, is there any doubt that those countries will opt for the latter? This could cause interest rates to rise sharply, causing our interest costs to increase even faster than our debt.

    Most people seem to agree that we will have to spend what is necessary to deal with the financial crisis. However, I think that the risks of escalating interest costs make it critical that we spend any “rescue money” as wisely as possible and lay a credible foundation for repairing our balance sheet as soon as the crisis is under control.