This has been a stormy week on Wall Street. First, Monday’s bankruptcy and closure of financial giant Lehman Brothers. Then, Bank of America acquired Merrill Lynch. And by the end of the week the government bailed out financial giant American International Group. This bailout comes after Uncle Sam already bailed out Fannie Mae and Freddie Mac a few weeks ago. While I am currently trying to figure out how to pay for my groceries for the upcoming week, the government is throwing around 85 Billion dollars at AIG. This makes me wonder where all this money is coming from…
I did some research to answer this question. This massive wave of failures is certainly not unprecedented. The market has been in crises before and the economy has had its fair share of ups and downs over the past decades. But it certainly has never had such a global impact as this time. Because markets are more interrelated now than ever before, other countries are affected by what’s happening on Wall Street. The US government is not alone in lending money to bail out some of these hurting international players. Some of the bailout money is coming from foreign countries. On Thursday last week, several foreign central banks including the European Central Bank and the Bank of Japan announced a plan to invest a combined 180 billion dollars into the global markets. The central banks are hoping to prevent an economic crisis with a global impact.
But where is all this cash coming from? Did someone open a treasure chest or do we have a secret savings account for situations like this? The answer is no. But the US Federal Reserve can sell some of its securities including treasury bills on the world markets. This will mean more international investment in the US market which can eventually lead to more instability. Other parts of the bailout money will of course come from us, the tax payers. So, remember to cut back on things you don’t really need and save up some money. Because it won’t be long until you have to pay your taxes again.