While It's Big, Bad and Ugly, The Bailout Is the Only Answer

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By Jane Bryant Quinn
Sunday, October 12, 2008

There's a lot of sloganeering around the Treasury's $700 billion financial rescue package, the Federal Reserve's $900 billion-plus lending authority, plus whatever else happens in the days ahead. Taxpayers need some clarification, so they don't hate the rescue anymore than is, well, reasonable.

Q Is the U.S. taxpayer losing $700 billion?

ANo. We're bailing Wall Street out of bad mortgage-related loans and other assets that no one else wants to buy. The Treasury will buy them at something more than their current, depressed market value. That adds capital to struggling banks, which they sorely need. At some point, the government will resell the assets to private investors.

The ultimate cost to the taxpayer depends on when the bleeding in home values stops and these assets rise in price. Peter Orszag, director of the Congressional Budget Office, expects the cost to be "substantially less than $700 billion but more likely than not to be greater than zero."

Will taxpayers make money by taking debt or equity stakes in the banks that sell the distressed assets to the government?

Orszag pours cold water on this idea. That's because the Treasury would have to pay more for assets that include a stake in the company than it would for the assets alone.

Where is the Treasury getting $700 billion?

It will borrow worldwide, by selling Treasury securities. Right now, there's a strong demand for them, so it's selling into a welcoming market. "It is remarkable how much capital the U.S. has been able to attract to finance its borrowing needs," says Brian Sack, Washington-based senior economist at Macroeconomic Advisers. That might change, he says, "but there are no clear signs, yet."

Are we adding $700 billion to the budget deficit while waiting to resell those impaired assets?

No. The money laid out to buy bad assets won't be counted as "spending" in the usual manner, as if the government put down money in exchange for goods. Instead, asset purchases will be scored on a "subsidy" basis. The Office of Management and Budget and the Congressional Budget Office will project how much the government might lose or gain over time by buying and selling assets and only the net amount gets added to the deficit.

That's the way the direct student-loan program is handled. The government lends money to students and parents who repay with interest. There's a net cost but not a large one.

Isn't any increase in the deficit a bad idea?


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