1. The US government loans money to the banks at 0% interest
2. The banks buy treasuries at 2% interest
Why is the US government selling treasuries in the first place? In order to have money to bail out the banks' earlier losses.
Net-net: the banks are stealing money from US taxpayers.
Do I have this right?
You're missing an important detail - this is nothing new.
Banks have always borrowed money from the US govt (and others) at X% and loaned it at Y%, where X < Y. (There's no point in that arrangement if X >= Y.)
US bonds are redeemed for US dollars. If the dollar becomes increasingly worthless, why would you want to hold the bond?
Granted, I think saying the dollar is "becoming increasingly worthless" is being hyperbolic.
But in this case, they seem to be borrowing long and lending short (or at least borrowing short and lending short).
It's not like the government is going to go demand it's money back like someone with a savings account is free to do.
And really, would you take $200k to the bank and deposit it at 0.5% interest and then take out a $200k mortgage at 6%? You might if you were concerned about liquidity (unsteady income?) and could get at the $200k in savings when you needed to. But if you didn't have that flexibility, it wouldn't make sense.
when the govt is giving out amount X money, and wants amount X + INTERESTX back. how can that work? where should INTERESTX come from when they only gave us X?
This ensures, that there is always debt. Money has value only if there is debt and you must use some to get out of it. Why would you need it otherwise?
The carry trade is nothing new either, it's often used for example when borrowing rates in other countries are favorable compared to rates on US treasuries.
Except for the free money part.