TARP Special Inspector General Neil Barofsky stunned everyone yesterday with an estimate that government support under the bailout could reach $23.7 trillion. It’s an eye-popping number. There is debate about what the $23.7 trillion number really means. The New York Times’ Floyd Norris deconstructs it today under the headline “Big Estimate, Worth Little.” However, we shouldn’t let this debate distract us from the fact that we are injecting a staggering amount of money into the economy. The taxpayer is out on a limb in support to the financial sector in a much bigger way than most people realize. If the $23.7 trillion figure helps to illustrate the extent to which our government has committed us to save the financial sector, then, with apologies to the New York Times, it’s worth a great deal.
It’s important to understand that $23.7 trillion is not a measure of what will be spent on the bailout, rather it is the total value of the amount of support available through government programs. Direct spending, through programs such as the stimulus, makes up just one part of this calculation. The loan programs through the Federal Reserve and FDIC intended to revive moribund credit markets are the most significant contributor.
Treasury points out that the $23.7 trillion figure is misleading because, among other things, it includes loans that have assets behind them. As an analogy, if the bank lends you $500,000 on a house, for the purpose of this calculation, the bank is providing $500,000 of support. That doesn’t mean that the bank will be out $500,000 if things go wrong. Ultimately they could sell the house for something. Similarly, much of the government lending has significant collateral behind it. Also, many of these programs, such as the $1 trillion TALF, are garnering little interest from investors so will likely never be fully utilized. So, let’s concede that under no conceivable circumstances will the taxpayer be out $23.7 trillion. But, that doesn’t mean we aren’t spending massive, unprecedented amounts of money on a scale that boggles the mind.
The truth is no one has ever put this kind of money into an economy before and no one knows with anything approaching certainty what will happen. Are we creating new bubbles (and preserving old ones) that will ultimately stagnate our economy? Richard Bernstein, writing in the Financial Times today thinks so. (LINK: America is Now Still Blowing Bubbles).
Others, such as Arthur Laffer ("Get Ready for Inflation and Higher Interest Rates") and John Taylor ("The Threat Faced By Ballooning Federal Reserves", have argued that the amount of money being spent is creating dangerous inflationary pressures that will wreak havoc on the economy down the road.
Regardless of the outcomes, the question remains. Did anyone ask us before they committed our money to back $23.7 trillion dollars in programs?
It’s important to understand that $23.7 trillion is not a measure of what will be spent on the bailout, rather it is the total value of the amount of support available through government programs. Direct spending, through programs such as the stimulus, makes up just one part of this calculation. The loan programs through the Federal Reserve and FDIC intended to revive moribund credit markets are the most significant contributor.
Treasury points out that the $23.7 trillion figure is misleading because, among other things, it includes loans that have assets behind them. As an analogy, if the bank lends you $500,000 on a house, for the purpose of this calculation, the bank is providing $500,000 of support. That doesn’t mean that the bank will be out $500,000 if things go wrong. Ultimately they could sell the house for something. Similarly, much of the government lending has significant collateral behind it. Also, many of these programs, such as the $1 trillion TALF, are garnering little interest from investors so will likely never be fully utilized. So, let’s concede that under no conceivable circumstances will the taxpayer be out $23.7 trillion. But, that doesn’t mean we aren’t spending massive, unprecedented amounts of money on a scale that boggles the mind.
The truth is no one has ever put this kind of money into an economy before and no one knows with anything approaching certainty what will happen. Are we creating new bubbles (and preserving old ones) that will ultimately stagnate our economy? Richard Bernstein, writing in the Financial Times today thinks so. (LINK: America is Now Still Blowing Bubbles).
…[T]he goal of Washington’s policies has been to stymie the inevitable consolidation, keeping companies operating – and employing voters – rather than managing the consolidation to maximise the economic benefit. History says that Washington’s is an unwise and ultimately fruitless strategy. Certainly, there may be short-term gains in an economy by keeping a bubble’s unnecessary capacity alive (this may explain the recent improvement in economic statistics), but the continued misallocation of capital significantly hinders longer-term growth.Bernstein goes on to argue that our policies are locking in overcapacity in the economy creating a situation analogous to Japan in the 1990s where we will limp along in economic stagnation for some time to come.
Others, such as Arthur Laffer ("Get Ready for Inflation and Higher Interest Rates") and John Taylor ("The Threat Faced By Ballooning Federal Reserves", have argued that the amount of money being spent is creating dangerous inflationary pressures that will wreak havoc on the economy down the road.
Regardless of the outcomes, the question remains. Did anyone ask us before they committed our money to back $23.7 trillion dollars in programs?
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Posted by: golf swing tips | February 11, 2011 at 10:24 PM