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Bailout Is As Big as Budget for Pentagon

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By Alejandro Lazo and Lori Montgomery
Washington Post Staff Writers
Saturday, September 20, 2008

The $500 billion that the U.S. government estimates that it will cost to buy the risky investments of financial institutions in coming months approaches what it costs to run the Pentagon for a year.

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That estimate of the economic rescue plan that Treasury Secretary Henry M. Paulson Jr. announced yesterday is on top of the nearly $200 billion he said earlier this month that he is willing to spend on the government's rescue of Fannie Mae and Freddie Mac.

The Pentagon budget last year was about $600 billion. Over time, Congress has appropriated a total of about $650 billion for the war in Iraq, plus $200 billion for Afghanistan.

The spending for the bailout will add to nearly record projected deficits this year and next, although the government has not yet decided how it will calculate those costs in the budget.

The cost of buying the bad loans at the core of the financial crisis is likely to push the national debt past $10 trillion for the first time early next year, according to the White House Budget Office.

What effect that spending will have on the U.S. economy is unclear, although it will almost surely complicate any policy plans the next administration will htave, fiscal observers said.

"The campaign agendas become irrelevant, this is the agenda of the new president," said Robert L. Bixby, executive director of the nonpartisan Concord Coalition. "Because this is of such magnitude, it is going to be job one of the new president."

Presidential candidates Sens. John McCain (R-Ariz.) and Barack Obama (D-Ill.) have promised billions in new tax cuts or new spending. But an expanding deficit could impair future economic growth, particularly if lawmakers pay down that debt by raising taxes.

The weak economy and a sharp increase in government spending has led the Congressional Budget Office to project that the deficit will be a near-record $407 billion when the budget year ends later this month.

The next president is likely to face a shortfall in January of well over $500 billion, according to congressional analysts.

Under the proposal Paulson laid out yesterday, the government will buy securities through a reverse auction process. While those securities are currently almost worthless, administration officials plan to hold them several years in the hopes that they will regain some, if not all, of the money the government spends.

In the meantime, the impact on the deficit is not clear because the money may not be completely lost. The Congressional Budget Office will determine next week what portion of the government's purchases should be counted against the deficit, essentially trying to determine how much will be recovered or lost, based on complicated economic models.

Fiscal observers noted that the problem now facing the government is the one that has plagued Wall Street over the last year: how to determine what these complicated loans are worth.

"If you have a smoothly functioning market, and you buy a security, it is worth what you paid for it, because that is what the market says it is worth, but the problem here is the market is not working," said James R. Horney, director of federal fiscal policy at the nonpartisan Center on Budget and Policy Priorities in Washington. "That is the whole issue: what are these things really worth?"


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