Who are the governments borrowing money from to inject it into the banking system?

Answer 1

The Treasury will hold regular auctions for Treasury securities and the buyers will be all the same entities that have been buying Treasury securities.

These include:

• Individuals
• Mutual funds
• Bond funds
• State and Local Governments
• Foreign central banks
• Foreign governments
• and any other entity that buys bonds

First of all, when money is injected into the U.S. economy or the markets it is not done by the government, it is done by the Federal Reserve. The government has no say so in the matter.

The $700 billion bailout was an authorization for the U.S. to spend money to bail out corporations. It was not for an "injection into the banking system". It is being loaned to some banks with the government taking responsibility for the loans (they go broke again, we pay) but those loans are being used for lots of reasons, including big banks gobbling up little banks.

ClarificationActually the TARP gave the Treasury very broad authority which included the ability to purchase stakes in US financial institutions to recapitalize them. This is actually the first phase of the TARP, the second will be the purchase of illiquid securities.

We (taxpayers) will have to pay interest on that money.

ClarificationIt is true that the Treasury has to pay interest on the money it borrows, but the dividend on the preferred shares that are being purchased from financial institutions is 5% for the first 5 years and then 9%. This dividend rate is higher than the interest rate the government needs to pay on its borrowing, currently 3.5% - 4%. In affect, we are all making money immediately on the investment into financial institutions.

Cash injections into the system, or money flow adjustments are different. They are achieved by creating Fiat currency. The main impact on the U.S. as a whole is inflationary, when they pull the rug out, or contract the money supply it causes deflationary pressures and economic slowdown.

The main reason many believe that the Federal Reserve is an unconstitutional entity is that it has usurped powers that should only be rightly had by Congress. The Federal Reserve is not government owned - See Supreme Court decision Lewis v. United States, 680 F.2d 1239 (1982)