Your Liability for the Bailout: $2,000 – Your Debt: $37,000
The text of bailout legislation that might pass through Congress this coming week is circulating on the blogs (and reliable sources too . . .). I’ve taken it and done a little analysis, based on a few assumptions that I will discuss below.
But here’s the punch line: The bailout will cost about $6,500 per U.S. family, a little over $2,000 per person.
The draft legislation would raise the public debt limit to $11.3 trillion dollars. That’s $116,000 per family, or $37,000 per person, in total governmental debt, which is really your debt.
Because this is draft legislation, and my own estimate rather than an official prediction, I will discuss those assumptions a little bit:
The bill would authorize the Secretary of the Treasury to purchase mortgage-related assets, and it would give him $700 billion dollars to work with. It is possible that the federal government will not expend all of those $700 billion, or even make some money back later on the assets it buys in the near term, but I agree with the blogger who called that laughable.
The Resolution Trust Corporation, which was created to clean up the S&L mess, had an estimated cost of about $50 billion in the early years, but wound up costing about $124 billion. So I assume that the $700 billion made available to the Treasury Secretary will be gone.
These are net present value calculations, made using current interest rates and population figures. I’ve treated the spending as occurring over three years, though most authorities in the draft legislation expire in two. It takes time to ramp up and wind down an operation like this, and it’s very hard to estimate when the spending will happen. This matters because future spending is cheaper than current spending. It’s very difficult to estimate costs when the situation is so fluid, but I think these are fair-to-conservative assumptions.
As I said before, there is almost no way that the government can tax this much money out of us directly. The U.S. government’s credit is obviously weakening, making borrowing more difficult. What will probably happen is that the government will inflate the currency by just printing more dollars. This taxes us a different way by making the cash we have worth less. This also imperils the viability of the dollar as a currency. Loss of confidence in the dollar would make this crisis look like a walk in the park.
The bailout is plainly a sop to the financial services companies whose profits were privatized and whose losses will now be socialized. That’s wrong. The proponents of the bailout, which appear to include most of our political leaders, say that it’s needed to prevent further financial catastrophe. Treasury Secretary Henry Paulson says that reforms will follow.
It’s up to you whom you agree with and whom you believe.