$700 Billion Was a Drop in the Bucket

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I remember when $29 billion sounded like a lot of money.

That was the sum of financing the Federal Reserve provided to JPMorgan Chase (NYSE: JPM  ) to facilitate the Bear Stearns acquisition back in March. The move may have felt unprecedented, but a century earlier it was J.P. Morgan himself who spearheaded a bailout of the financial system to bring the Panic of 1907 to a close. History is repeating itself lately, so it seems only natural that this company would be called upon again.

From the millions of U.S. dollars tossed about in 1907, to the $700 billion bailout authorized last week, it's clear we're operating on a different scale this time around. Don't get too cozy here in the billions though, Fools, because we've already leapt straight into the trillions. Yes, just a week after the palpable outrage over a $700 billion price tag has begun to erode, my comprehensive tally of total existing and announced outlays from the U.S. Treasury and the Federal Reserve relating to this financial crisis is approaching the $4 trillion mark!



Amount of Outlay

Term Auction Facility

Federal Reserve

$900 billion

Emergency Economic Stabilization Act of 2008

U.S. Treasury

$700 billion

Total USD international currency swaps

Federal Reserve

$620 billion

Other loans: Primary Dealer Credit, etc.

Federal Reserve

$409.5 billion

Hope for Homeowners Act of 2008

U.S. Treasury

$304 billion

Fannie Mae (NYSE: FNM  )

& Freddie Mac (NYSE: FRE  )

U.S. Treasury

$200 billion

Term Securities Lending Facility

Federal Reserve

$200 billion

Economic Stimulus Act of 2008

U.S. Treasury

$168 billion

Paid to JPMorgan Chase to settle Lehman debt

Federal Reserve

$138 billion

AIG (NYSE: AIG  ) Bailout

Federal Reserve

$122.8 billion

Commercial Paper Funding Facility

Federal Reserve

$100 billion*

Bear Stearns Brokered Sale

Federal Reserve

$29 billion

Drum roll, please...



* Conservative estimate based upon the reported size of the daily commercial paper market. "Other loans" total from the Fed's statistical release as of October 1, 2008, and includes the money market funds backstop program of $152 billion.

While we let that sink in for a moment, let's be clear on two points. First, virtually all of these outlays are considered temporary in nature. Through its Term Auction Facility, for example, the Federal Reserve has scheduled auctions for loans with maturities extending only as far as March 2009. On the other hand, we have no way of knowing just how temporary these measures will be. We're told the $700 billion bailout will purchase assets that will be sold once a market reemerges, but we've been given no timeline for how long that could take. Meanwhile, I maintain that the longer those dollars remain in circulation, the greater their ability to debase the value of the dollars sitting in your wallet.

Second, not all of these outlays have occurred quite yet. The Fed's newest facility to support the market for commercial paper was just announced on Tuesday, and the press release did not specify what portion of the $1.3 trillion market from eligible issuers this new facility would represent. For now, I have used a conservative estimate of $100 billion. Also, a doubling of the Term Auction Facility total from $450 billion to $900 billion was just announced on Monday, but the dollars haven't been printed yet. Around mid-September it became clear that further outlays from the Federal Reserve would necessitate fresh money.

Who's going to pay for all this?
At some point, we must concede that the scale of these outlays calls into question the collective ability of the borrowers to repay these loans. How long will it take for a struggling global economy to repay $3.89 trillion? Clearly, we just don't know. We do know that both the Federal Reserve and the Treasury are amassing debt securities as collateral that no private entity will touch with a ten foot pole right now.

The indications from Washington that dollars will be hurled at this crisis in totally unprecedented quantities raises legitimate concerns about the future purchasing power of the dollars in your wallet, your CDs, Treasury bonds, or other dollar-denominated instruments. Occurring in a vacuum, a deleveraging event like this one would be decidedly deflationary. In the context of these outlays, however, I believe stagflation and hyperinflation will instead be among the words used by historians to describe this period.

In an environment where financials like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) are slashing or canceling dividends, treasury yields are below even the official CPI, and money market funds are struggling not to "break the buck", finding an attractive place to park one's dollars through this sell-off is a challenge of its own. My advice: keep your funds liquid, Fool. I believe opportunities to outperform higher rates of inflation within select equity sectors will soon abound.

Further Foolishness:

Representing a basket of commodity-related picks, Christopher's CAPS score has plummeted from the top one percentile to the complete opposite end of the spectrum since the spectacular summer sell-off in commodities. He thinks his pain could be your gain, and invites you to explore his picks, create your own CAPS profile, and see how your picks compare to the 110,000-member CAPS community.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (52)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2008, at 7:44 PM, Laisseraller wrote:

    Great Article! a new blog giving deeper meaning into the $700 billion bail-out plan

  • Report this Comment On October 09, 2008, at 7:58 PM, xpchristopher wrote:

    This is exactly what Ron Paul has been saying for quite a while now.

  • Report this Comment On October 09, 2008, at 9:24 PM, XMFSinchiruna wrote:

    It looks as though I've overlooked the $50 billion approved to Treasury by the President to guarantee money market holdings.

    As noted beneath the table above, I did include the Fed's $152 billion outlay through the "Asset-Backed Commercial Paper Money Market Fund Liquidity Facility", announced September 19.

    The updated tally, then, stands at $3.94 trillion.

  • Report this Comment On October 09, 2008, at 9:32 PM, XMFSinchiruna wrote:

    Alright, alright... which 14 of you recommended the blog post, but not the article. ;P

    Just kidding... thanks for reading, everyone!

  • Report this Comment On October 09, 2008, at 10:04 PM, rd80 wrote:

    Wasn't there an essentially unlimited borrowing facility at the Treasury in addition to the $200 billion backstop for Frannie Mac Mae? Don't know how you put a price tag on that.

    I don't know if there's an estimate, but WFC will be getting a huge tax break on the purchase of WB.

    Thanks for keeping the tab on this. It'll be a great resource for future letters to congress critters.

  • Report this Comment On October 10, 2008, at 1:58 PM, cliffyworld wrote:

    For info on how it all began, read the article titled "It's Not Always The Pork. The Cows All Have To Be Fed Too." at

  • Report this Comment On October 10, 2008, at 4:06 PM, TheDash9 wrote:

    An interesting and humorous take on the current market.

  • Report this Comment On October 13, 2008, at 8:57 PM, geophysique wrote:

    So who is supplying the 3+ Trillion Dollars for this loan -right now-? Where is the money coming from? Who is willing to give our Federal Government or Federal Reserve the money to outlay all of this capital? They cannot just -print- a couple trillion and say -here ya go don't spend it all in one place- so who is providing the capital? A commercial lending institution is required to have at least 10% of a loan on hand provided by other depositors, so who is providing the capital, who is the actual lender, and who is collecting the interest on it? 3 Trillion Dollars cannot just appear out of thin air, it must have some sort of origin and interest applied.

  • Report this Comment On October 14, 2008, at 9:58 PM, nolodie wrote:

    Chris... your article expresses succinctly what I've been thinking all weekend. Thanks for putting it out there; you're the first one I've seen to post these troubling words. I'm not a financial expert, but it seems to me that the US and European governments are basically printing more dollars, euros, and pounds to solve this crisis. These banks won't be sold back for a profit, at least not any time soon. Taxpayer dollars? You're kidding me... with an existing $10 trillion dollar national debt and $500++ billion (cumulative) war expenditure? The Japanese are out of the picture; they're now bailing out their banks. China can't seem to get enough US Treasury Bonds, and their economy is still growing at an insane rate despite the "world" economic crisis. The Dutch seem to be in good shape; I haven't seen ING, the 9th largest public company in the world, hurting for cash lately. It looks to me like the socialists are positioned to take over... which is fine by me.

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