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Sunday, April 6, 2008

How Much did the Bear Stearns Bailout Cost you?

The Federal Reserve recently bailed out Bear Stearns. The Federal Reserve printed $29 billion in new money and gave it to JP Morgan Chase to finance the buyout. (Technically, it was a loan, but at a negative real interest rate of 2.5%, it's essentially a gift.)

According to the Federal Reserve, in February 2008, the M2 money supply was $7.57 trillion. Dividing $29 billion by $7570 billion is 0.38%. All outstanding dollars lost 0.38% of their value when the Federal Reserve printed $29 billion in new money. If you had $10,000 in a checking account, you personally paid $38 to finance the bailout.

The above statement is slightly inaccurate. The US has a fractional reserve banking system. When the Federal Reserve prints $29 billion in new money, that technically causes $290 billion of inflation. For each dollar created by the Federal Reserve, the financial industry then creates nine more dollars, through the power of fractional reserve banking. Viewed this way, the Federal Reserve caused $290 billion of inflation when it bailed out Bear Stearns. Using this calculation, all outstanding dollars lost 3.8% of their value when the Federal Reserve printed new money to bail out Bear Stearns.

The cost of the Federal Reserve isn't free. Everyone else pays the cost as inflation.

2 comments:

Nate said...

This is an interesting post. I think a follow up showing the costs of FED intervention and debt, re: dollar value would be cool.

Perhaps pick 5 or 8 events and detail the M2 value at the time, and then the ratio of inflationary loss.

Anonymous said...

Your blog on this matter is highly inaccurate and shows a complete lack of knowledge of fiscal matters.

I would break it down and point out your mistakes individually but to do that would require your post to have some basis in the real world to start off from.

Please kindly put down the retards book of 'Money for Dummies' and step away from the computer.

This Blog Has Moved!

My blog has moved. Check out my new blog at realfreemarket.org.