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How Are Banks Spending Bailout Money? Anyone's Guess

Many banks are spending the TARP money to buy weaker banks. The goverment probaly always intended for this to happen. The reason is very simple- so many banks are in trouble that there was no hope the FDIC could handle all of the eventual failures. Take for instance Wachovia if they failed the insured deposits were over $170 billion, the FDIC had $40-45 billion available after IndyMac was taken over by the FDIC. Banks are failing at rates not seen since the Great Depression. Only you don't hear about that becasue the FDIC is not taking them over they are merging them with a stronger bank. This is a necessary evil. If the goverment let every bank fail that is eventually being taken over the banking system would have collapsed.
Also keep in mind the goverment did NOT "give" the money to the banks. Rather the goverment bought preffered stock in each bank that took the TARP funds and is earing a 5% return on the TARP funds. Think about that for a second, the goverment is now borrowing money at historicly low interest rates (10 yr treasury at 2.2-2.5%) and is loaning that money out at 5% with a possible upside with the conversion of the preffered stock.

Deflation: It's Starting to Get Silly

As usual by the time the fed announces their intention to fight a trend it is well under way. For most Americans their house is the largest asset they own and it has been deflating for over 2 years. For year the government told us there was low inflation while home prices soared now there is deflation as they fall. There is nothing the fed or anyone else can do about that. The American consumer has stopped spending like a drunken sailor becasue they are in grave (is there any other kind?) danger of losing their job and the one asset they felt was safe is now tanking. There wil be pain as this happens but the long term is much brighter. Americans are learning what their granparents knew, savings is good thing to have and a home (that you live in) is not an investment or a piggy bank.