The Biggest Government Bailout Is Yet To Come

The Fed is also extending and expanding its TALF program to $1 trillion, from the original $200 billion. TALF, which stands for Term Asset-Backed Securities Loan Facility, is little-known to most taxpayers—but it's a hero to banks and is widely credited with restarting the moribund credit markets, particularly for loans backed by credit cards and autos. The program offers cheap loans to investors to buy securities and is being expanded to accept commercial mortgage-backed securities as collateral. That's no coincidence. The Fed is clearly hoping to forestall the expected crash in a market in which $1.4 trillion of loans will be maturing in the next five years.

The Fed buying government-backed mortgage bonds is a classic example of the government bailing itself out. The Federal Housing Administration got into the act, guaranteeing billions in Ginnie Mae bonds before it couldn't afford to keep up with demand from the banks. The FHA had quite a run, however, backing 23 percent of new loans in 2009, compared with 3 percent in 2006, according to AOL's Daily Finance. The Federal Home Loan Banks, a government-sponsored enterprise that helps banks make mortgage loans, has already lent so much that it is funding banks at a 10-year low. The end result has been some bizarre entrants into the federal mortgage game, offering no-money-down, fully financed mortgage loans to keep the money sluicing through the system at taxpayer expense. The U.S. Department of Agriculture, of all things, has boosted a $10.5 billion mortgage-lending program that was meant for farms but is now being used for three-bedroom colonials. What next? Will the Parks Department set up a mortgage desk?

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And it's not just mortgages by which the government is trying to save itself. The U.S .government has auctioned $7 trillion of Treasuries this year alone to help fund the bailouts—$1 trillion more than it did in 2008. And who is buying all those Treasuries to help fund the bailout? The Federal Reserve, which owned $4.875 trillion of Treasuries as of March, making it the biggest holder of U.S. government debt. The Fed is also the biggest continuing buyer of Treasuries, snapping up 48 percent of the $339 billion in net new Treasuries sold as of the second quarter, according to the Wall Street Journal, and poised to dominate again as the Treasury auctions off a record $112 billion in bonds soon. In short, the Treasury is issuing bonds to fund the bailouts so the Fed can buy the bonds to fund the bailouts that the Fed helped create.

It's a toxic loop of government spending. It seems quaint that a year ago Congress was worried that a single $700 billion bank bailout would cause the government to implode. Now we are committed to trillions more, mostly in a housing market still on sketchy ground, which could turn against us any time. The government gets some credit for recognizing the danger now—and trying to pull back before it hits the debt ceiling in just three weeks. But its reductions are paltry compared with the size of its problem: the $1.4 trillion in upcoming maturing commercial mortgage loans and the trillions more in U.S. mortgages in record foreclosures. Pulling back all government stimulus would be a disaster for the markets, which have learned to seek comfort in Uncle Sam's arms. But many of these government programs were enacted hastily, work in opaque ways, and are still being badly accounted for. Perhaps we need a bailout czar.