Much of the concern about the Fed lending out tens of billions of dollars to financial institutions is that tax-payers will eventually pay the bill.
The Fed is taking in securities from banks and primary dealer in exchange for cash. For the financial companies it is a great deal, a true bail-out. They can turn in paper that is probably worth far less than $1 in exchange for $1 in real capital.The Fed obviously thinks this will push up faith in the financial companies and keep outside investors like hedge funds from pulling their massive pools of capital out.
Banks and brokerages can’t afford to hold securities of dubious value. That could lead to more write-offs and a greater panic. The Fed can take these securities and may get a great deal of value from them if they are held to maturity. A large percentage of subprime mortgages will be paid off. Investment which are locked up in parts of the credit market which do not trade will eventually trade again.
But, the Fed will not get all of its money back. Everyone knows that. Its "balance sheet" will take a hit. This will be passed on through the government’s hands to tax-payers in the form of inflation or a higher bill each April 15.
The citizens filing their taxes this year and next are not going to kick. The reason is simple. A few extra dollars in payments or inflation are better than a financial industry in collapse. The ripples of that will spread to almost every industry, and that means a spike in unemployment as companies try to save their P&Ls. Everyone would rather send a slightly larger check to the IRS in exchange for keeping a job.
Douglas A. McIntyre