The bailout nightmare continues... now with the new spin that the government is saying, with a straight face, that the bailouts will only cost us $87 billion. You heard that right, $87 billion. Pocket change, right?

Treasury Secretary Timothy Geithner is telling Congress that the administration believes the final cost of the government's heavily criticized financial bailout effort could be as low as $87 billion...

The new estimate said the biggest losses will occur from the government's support of mortgage companies Fannie Mae and Freddie Mac. That loss was put at $85 billion followed by a loss of $49 billion from providing help to homeowners facing the threat of losing their homes through foreclosures.

Geithner's letter estimated that the government would lose $48 billion through the support provided to insurance giant American International Group and another $28 billion would be lost through the billions of dollars in assistance provided to General Motors, Chrysler and their auto financing arms.

The biggest offset to those losses will be earnings of $115 billion that the administration expects the Federal Reserve to realize from the extraordinary assistance it has given to provide liquidity to the financial system.

Any guesses to the problem with this government-style accounting? And I mean aside from the fact that, at this point, we're just taking Geithner's claims at face value regarding the specific amounts mentioned above?

The real problem is in the last paragraph of the above quote. It mentioned $210 billion in losses from federal bailouts and then offset them with $115 billion in "earnings" from the Federal Reserve. The problem is that the Federal Reserve is independent from the federal government and congressional appropriations. The Federal Reserve could have provided liquidity (i.e. printed money) without any bailouts from Congress and, in that situation, the Federal Reserve would've rebated $115 billion to the Federal Government without any of the $210 billion in losses specified above.

If we assume Geithner's numbers are correct, the losses aren't $87 billion. They're $210 billion. The "profits" from the Federal Reserve are a completely different matter.

Of course, if you're going to count the Federal Reserve's "earnings" as offsets towards profit/loss, you should also include the Federal Reserve's balance sheet and liabilities. The Federal Reserve didn't just generate $115 billion out of thin air (at least not this time). Those supposed profits are from the Federal Reserve taking on huge risk, and those risks are still present.

The reality is that while the American public and the media have been focused on a $700 billion TARP bailout and a $787 billion stimulus package, the Federal Reserve has been the primary player in the bailouts. While the Federal Government, authorized by the Congress, has been responsible for bailouts measured in billions of dollars, the Federal Reserve has been playing games with trillions of dollars--with no legislative authorization required.

CMD concludes that multiple federal agencies have disbursed $4.6 trillion dollars in supporting the financial sector since the meltdown in 2007-2008. Of that, $2 trillion is still outstanding. Our tally shows that the Federal Reserve is the real source of the bailout funds.

CMD's assessment demonstrates that while the press has focused its attention on the $700 billion TARP bill passed by Congress, the Federal Reserve has provided by far the bulk of the funding for the bailout in the form of loans amounting to $3.8 trillion. Little information has been disclosed about what collateral taxpayers have received in return for these loans, sparking the Bloomberg News lawsuit covered earlier. CMD also concludes that the bailout is far from over, as the government has active programs authorized to cost up to $2.9 trillion and still has $2 trillion in outstanding investments and loans.

So, yes, when the Federal Reserve may very well rebate $115 billion to the federal government. If we split the difference between the $3.8 trillion loaned and the $2 trillion still outstanding, then generating $115 billion of profits on approximately $2.9 trillion is only about 4% interest.

That's great until you realize that much of those trillions of dollars of "assets" are the toxic assets that caused the whole crisis to start with. The Federal Reserve essentially owns trillions of dollars worth of mortgages that the private sector didn't want to touch. And as long as those homeowners are paying their mortgages, no problem. But many of them won't. Many will lose their job, many will be unable to afford their mortgage when their ARM loan resets to a higher interest rate, and many will simply walk away from their house when they realize it's worth less than what they owe. These are exactly the same risks and problems that shocked the private sector and shut down lending because everyone was so afraid of borrowers not paying the money back.

The Federal Reserve now holds all those ticking financial time bombs that caused the crisis. Those toxic assets haven't gone away. They've just been transferred from banks and investment firms to the Federal Reserve; they've been swept under the rug where they're not as visible to the public--but they're just as toxic as they were to the private sector, and they can still do just as much damage.

The only difference is it's now our central bank that's going to be stuck holding the grenade when those toxic assets go "boom."

The problem never went away -- it just moved from the private sector to the government. That's why, lately, a lot of private sector businesses have been reporting profits, even the banks. All of their bad gambles--which should have caused them to go bankrupt--now belong, primarily, to the Federal Reserve.

So what happens when those toxic assets go "boom?" What happens when an increasing number of those mortgages aren't just toxic, they're outright worthless because the homeowner isn't paying the mortgage anymore? Our central bank, the Federal Reserve, won't go bankrupt since they can just print more money. Actually, they already have. But all that money that has been printed was basically exchanged for all these toxic assets, the idea being that the money will be paid back and can subsequently be taken out of circulation. But if the money isn't paid back and isn't taken out of circulation then two things will happen: 1) All that printed money becomes highly inflationary. 2) The housing market collapses once again because there will be so many more foreclosed properties.

Will those toxic assets actually go boom? If they don't go boom then the whole crisis was an absolute farce from the beginning.

But what is clear is that, no matter how you look at it, the claim that the bailouts only cost $87 billion is nonsense. This is classic government-style accounting. The kind of accounting that would get individuals in the private sector thrown in jail, and the same kind of accounting that gave us the myth of the Clinton surplus (the "surplus" never existed).

It's downright insulting for Geithner, or anyone else, to try to shovel this bull on the American public. We should be suspicious of anyone that promotes this number.