Posted by
cavalier973 on Wednesday, October 15, 2008 6:08:04 PM
Imagine that the Bailey Building & Loan had some of their mortgages pay off, and that George is considering using the infusion of cash to extend a loan to some business or other. I approach him for a loan to keep my "Pizza Flavored Soda Pop Co." afloat, which is doing poorly. There is another company, "The American Soft Drink Co.", that is doing well, but needs to borrow some money to expand its factory. Under normal circumstances, George Bailey would obviously extend the loan to the The American Soft Drink Co.
But I have connections with the mayor, who agrees to loan me the money directly from the town coffers. To make this loan, the mayor sells a municipal bond (a G.O., 8%). Instead of loaning the money to the American Soft Drink Co., George buys several of the Bedford Falls Municipal Bonds. Again, the money raised from the muni sale goes to me in the form of a loan. What happened, in effect, is that I used my political connections to get George Bailey to give me a loan instead of him loaning it to the American Soft Drink Co. The result? Now people have to put up with disgusting Pizza-flavored soda for a while longer, while all the extra production of tasty soda has been put on hold.
That's sort of what's happening with the "infusion of capital" the government is making by helping out the banks. The Federal Goverment will borrow money from the capital markets, in the form of bonds, and lending it to the institutions that the capital markets were too smart to lend to, before the government intervened.