Even before the financial bailout was suggested last weekend, the nonpartisan Congressional Budget Office estimated that the red ink would reach $438 billion in fiscal year 2009, which begins Oct. 1. Add in the extension of some popular tax breaks, which Congress is expected to pass, and the deficit balloons to $540 billion, nearly $130 billion more than the previous record.
No one expects all of the $700 billion to be spent right away. But Stan Collender, a budget expert at Qorvis Communications, said the bulk of the money will likely be doled out in the first year. “My guess is that Treasury will want to move very quickly,” Mr. Collender said.
Under the reasonable assumption that Treasury spends at least $500 billion buying up the “toxic” securities over the next 12 months, the 2009 deficit would top $1 trillion. “And that assumes no stimulus spending or any other Democratic add-ons,” Mr. Collender added.
Budget experts stress that nobody knows how much the bailout will ultimately cost taxpayers because nobody knows what prices the government will pay for the asset-backed securities or what prices they might fetch when they are resold.
Treasury officials assert that the bottom-line cost will be far less than the initial outlay because much if not most of that expense will be returned to federal coffers by the eventual sale to the public of those assets.
But some economists say that the ultimate cost to the taxpayers could be higher than $700 billion.
“I expect that [Treasury] Secretary [Henry] Paulson or his successor will, if Congress grants the $700 billion request, be back for more before long,” said Willem Buiter, a professor at the London School of Economics, who advises governments and central banks.
The next request will “probably [be] at least another $700 billion, as it is unlikely that a crisis of the magnitude we are witnessing will be resolved without the taxpayer coughing up at least 10 percent of annual [gross domestic product].”
Ken Rogoff, a Harvard academic and former chief economist at the International Monetary Fund, said it is unimaginable that the eventual cost to the government would be less than 6 percent to 7 percent of GDP, which would put the taxpayer on the hook in the range of $870 billion to $1 trillion-plus.
Nouriel Roubini, a New York University economist who was years ahead of others in predicting the current market turmoil, projected in August that “this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion.” So far, banks have taken $500 billion in write-offs, leaving as much as $1.5 trillion more to be absorbed by taxpayers.
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