Where do the funds for the bailouts and related rescue efforts in fact come from?

BY busadmin  September 22, 2008 at 12:01 PM EDT

From left: Fed Reserve Chairman Ben Bernanke, President Bush, Treasury Secretary Henry Paulson; AP Photo

Question/Comment: I have 2 naive questions:
1. This is a nuts and bolts/dollars and sense (pun intended) question: Where do the funds for the bailouts and related rescue efforts in fact come from? What is the source of the funds? I know “the taxpayer,” but where are these billions, projected trillion, of dollars that are being spent and/or pledged actually in existence, or to what extent are they?

2. If, as was suggested by someone on the NewsHour earlier, we are witnessing a failure of the +/- “pure” capitalist system coupled with the need for government to provide massive monies to stabilize if not rescue its participants as well as to construct a regulatory system to protect against future similar events, how does that compare with the concept of a controlled model such as China’s that introduces capitalist elements subject to government supervision (which I consider a stronger concept than regulation)? How divergent are the resolutions to the weaknesses to the two extremes?

In answering these questions, just remember I was a mere English major.

Paul Solman: And I was a mere sociology major who switched from art history at the end of my junior year. So maybe you should stop reading at this point. But if you haven’t:

1. The Fed creates money; the Treasury borrows it. In theory, there’s no limit to either. The question is only: What does it wind up costing us all? That’s not an easy answer, because sometimes creating money can actually improve an economy and lead to more growth than would otherwise be the case.

You can scan some of my other answers to previous questions along the same lines to get a fuller sense of this, as best I can explain it.

2. Great question (and not just for an English major). One way to look at today’s economic systems is along a continuum, from more to less government intervention. This is a very crude approximation of reality and some would say China is on a different axis entirely, but if you think of Sweden and Denmark at one extreme (with maybe 60% of GDP in public hands), and the U.S. at the other (something like 30%), you have an idea of what I mean.

Where’s the right balance? Does it shift over time, depending on circumstances? Is there a maximum amount of government involvement? A minimum? An optimum? Don’t know. But one thing’s for sure: the U.S. is swinging in Denmark’s direction just at the moment, and probably for the foreseeable future.