The Big Hoopla - Understanding the Federal Bailout

The street version of the “Federal Reserve” bailout

We are hearing a lot of usage of the term “bailout” from every politician and economists. As you all know there is a lot going on in the financial systems today. But what does this mean to you and me? What does the term “bailout” mean and how does it work?

Never fear, the Fed is here! Is something that came to mind when the Fed’s announced the infamous bailout package of $700BN (billion) to jumpstart the economy. Here is why, in my opinion it is being done. You see the Federal Reserve is bailing out only the biggest institution because that is where they have their 401 (k) plan. So if they don’t bail them out and the markets crash, their 401 (k) will be wiped out. But that is just my opinion and what does my opinion matter.

Here is how “bailout” works. Recently, one of my friends had a problem. He was about to overdraw from one of his checking account (let’s call it Bank Account A) because he needed the money and payday was three days from that day. The problem is, he had a balance of $0.18 cents in Bank Account A. So he “bailed” himself out.

He lived in another state where he had Bank Account B, which he never closed after moving to the state of California. Problem is, this Bank Account B also had $0.16 cents. He wrote himself a check of $500 from Bank Account B and deposited in Bank Account A. Why would he write a check of $500 from Bank B if he only had $0.16 cents in his account? Very simple, he needed the money! The Bank Account A gave him credit for the check and it would take 3 – 4 days before the funds would clear, and by that time it was payday!

Similarly, the Fed agreed to loan the money they just minted (similar to my friends check of $500 from Bank B that he deposited in Bank A) to businesses who had worthless loans (similar to my friends Bank Account A that was about to be overdrawn). The Fed gave all the money these defaulting companies needed to make them “look” strong and solid again. In return, Fed gets a claim to one of several important assets as collateral.

Hope this helps in understanding the big “bailout” hoopla. If you have further questions, or need further clarifications on any topics that affect your industry feel free to contact me. The Big Hoopla is all about topics that you care to know more about.

Val G. is a Professional Search Recruiter at Volt’s Professional Search Division. He is also a Six Sigma Yellow Belt. He works with leading companies as an additional resource in their hunt for exceptional, full time / direct hire talents.