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ANALYSIS: Bailout plan costliest rescue in U.S. history
Question of the Day
The administration's emergency plan to buy up bad mortgages and other unmarketable assets will be the costliest economic rescue in U.S. history, pushing the government's annual budget deficit to more than $700 billion and preventing the next president from making good on many, if any, expensive campaign promises.
Private economists and former government officials estimated the massive cost to taxpayers of the latest bailout plan, now being written by Treasury officials and congressional leaders, at between $500 billion and $1 trillion.
That price tag would come on top of the several hundred billion dollars the government has already committed to backstop the investment bank Bear Stearns, the insurer American International Group Inc. and the mortgage finance giants Fannie Mae and Freddie Mac - all efforts to prevent a spiral of bankruptcies that threatened both the U.S. and global economy.
Not since the Great Depression has Washington intervened so massively to protect the economy. The bailout of the savings and loan industry, in the end, cost $150 billion. The Great Depression rescue programs cost less than $50 billion, though that much in 1935 dollars is more than $500 billion in today's terms.
What is certain is that the expenditures now will wreak havoc on the hopes of the current crop of presidential candidates. The winner of the presidential election will have to severely curtail his tax-and-spending promises, scholars say.
Related stories: Paulson resists calls for added help in bailout and Democrats vow to refine rescue plan
"Whoever walks into the Oval Office in January is going to be facing the largest deficit that any president will have faced in the history of the country," said former White House Chief of Staff Leon Panetta, who also served as President Clinton's budget director.
"The estimates I've seen as a result of our economic weaknesses we are suffering, the federal budget deficit is easily going to approach $700 billion when the new president comes in," Mr. Panetta told The Washington Times in a telephone interview.
The gross national debt now stands at more than $9.6 trillion, but that number could easily run over $11 trillion next year once all of the bailout's borrowing costs are fully accounted for.
But the magnitude of the bailout may in the end be lower than its upfront costs appear, economic policy analysts said, because the government bailout plan envisions recouping much of its cost when a variety of assets taken as collateral are sold at a later time for more than the government paid for them.
"They are going to buy assets from the banks at very low prices, and then when the situation normalizes, they are hoping they can sell these assets at least at the cost they paid. In the end, it might not cost the taxpayers a lot," said Desmond Lachman, an economist at the American Enterprise Institute.
The savings and loan fiasco in the late 1980s forced the government to pay off depositors in hundreds of failed banks that costs hundreds of billions of dollars, but after the Resolution Trust Corporation sold off billions in bank assets, the cost to taxpayers was $130 billion.
Mr. Panetta said the costs of the plan will be so huge that "the new president will have to make a fundamental decision about whether he can afford to continue to borrow and spend, or whether he is going to be willing to make the tough decisions to put the country on the road to fiscal responsibility."
"I don't think there's any question that Barack Obama is going to be severely limited to making the promises he made in his campaign and the same is true for John McCain," he said.
Republicans, too, acknowledged that the costs could severely limit what government can spend in the coming years. "The price tag certainly could threaten the government's ability to deal with its day-to-day programs. And this problem will only get worse in the next few years as the entitlement time bomb begins to go off," said Cesar Conda, former chief domestic policy adviser to Vice President Dick Cheney.
But economists said severity of the economic chaos spawned by the collapse of the housing and credit industries would take a long time to overcome and that there was no alternative to government intervention to deal with the economic catastrophe.
"There's no question there is going to be pretty big fiscal costs, but you really have to consider what the alternatives will be. If they don't do something with some kind of rescue package, you could get a financial market meltdown that would have serious consequences for Main Street America," Mr. Lachman said.
Conservatives remained critical of the bailouts. Economist Alan Reynolds at the libertarian Cato Institute called the government's intervention "creeping socialism."
But Mr. Lachman added that "the bottom line is that we've got ourselves into a real mess, where the policy alternatives aren't attractive. I see what they are doing as the least of the evils."
Still, the price tag and the challenges posed by the bankrupt institutions that the government is bailing out remain huge by any historical comparison, though the White House Office of Management and Budget attempted to soften its fiscal impact Friday.
"It is too early to tell how the government's plan to prevent further systemic risk to the market will impact the debt and deficit. We will implement an approach that balances the need to address problems with the market with the need to minimize the risk, exposure, loss of taxpayers dollars," OMB said.
"While the maximum exposure is large, the potential also exists to recover nearly all or perhaps even more of the funds that we spend to purchase the assets as the market stabilizes," the budget agency said.
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