Question: You did a great job explaining where the money for the bailouts comes from. Can you now tell us where, exactly, it is going?
If there are so many trillions of dollars sloshing about, how come the banks aren’t lending and businesses are laying off employees? Where is all the bailout money hiding?
Paul Solman: Back at the Fed! The banks are obliged to keep a cushion of deposits at the Fed, in the form of vault cash or Federal reserves. (Electronic cash of the Fed.) The bitter truth is that the banks have been REDEPOSITING the electronic money the Fed has been creating at the Fed.
Why? Because banks are afraid to lend money these days – whether it’s your or my deposits or the Fed’s. And borrowers aren’t clamoring for the money either. Not borrowers likely to repay.