East Coast Economics

Putting Things Into Perspective: The Bailout

with 6 comments

The government is adding to the bailout tab almost daily, and no slowdown is in sight.  The total cost of equity infusions for financial institutions, guarantees and lending facilities to date is estimated anywhere between $4 and $8 trillion, depending on which programs are included in the count. The following chart shows some of the biggest ticket items in the US budget over the last 200 years, adjusted for inflation (i.e. in today’s dollars).

bailout-comp1

Below is the same chart, this time including the 2008 / 2009 bailout package (using the most conservative end of the range with an estimated total cost to date of $4.3 trillion).  For reference, the total cost of World War II to the US was roughly $3.6 trillion.

big-budget2

Remind me why people are still talking about “deleveraging”?

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Written by eastcoasteconomics

February 4, 2009 at 1:11 pm

Posted in Bailout

Tagged with ,

6 Responses

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  1. Great post. Indiscriminate spending won’t get us out of the current downturn. I find it particularly distressing that so much of the proposed spending doesn’t appear to have any sort of likely true ROI. For example, how does providing funds to a get-out-the-vote group like ACORN stimulate the economy other than providing some jobs?

    According to the SBA 60% of net new jobs in the past decade have originated from firms employing less than 500 employees, yet I see very little of the stimulus plan focused on encouraging entrepreneurial activity. A small percentage of the funds being discussed are targeted for increasing SBA lending. Why isn’t there a substantial increase in SBA loan funds along with a loosening of the very restrictive SBA underwriting criteria? Shouldn’t grants and tax cuts to small businesses be a significant portion of any stimulus plan?

    Eric
    OregonBusinessBrokers.org

    bizsale

    February 4, 2009 at 1:46 pm

  2. This is a bit misleading.

    The items listed in the first chart were all expenditures that produced non-monetary ends (e.g. Louisiana purchase gave us a big chunk of land; space program gave us rockets). The bailout is intended to rescue the economy, but the $800B is also expected to produce a monetary return. When it’s all unwound, it will *not* cost the taxpayers $800B.

    Steve Davis

    February 4, 2009 at 2:45 pm

  3. I really like your blog. Great job on it.

    But I must say that you’re using some misleading data here to create a distorted contrast. I too am Harvard-educated (AB Economics ’97) and wish you were a lot more thoughtful on comparing apples-to-apples here. As Steve points out in his comment, it’s critical to focus on true cost after these distressed assets are liquidated.

    I realize it’s a much tougher analysis but the S&L Crisis showed with the Resolution Trust Corp that recovering value from distressed assets is possible, even probable. The S&L Crisis cost in your chart seems to be valued correctly per the GAO final report on the RTC. But how can you have any confidence that $4.3 trillion is the “conservative” estimate of today’s bailout cost?

    Kevin

    February 4, 2009 at 6:18 pm

  4. a) A pie chart probably isn’t the best way to present this, since 100% is not a quantity that’s easily digestible

    b) As a friend pointed out, % of GDP may be a more appropriate indicator

    c) Ezra pointed me to your blog. Very impressive 🙂

    Darrick

    February 4, 2009 at 9:38 pm

  5. > Why are people still talking about deleveraging?

    This spending is designed to offset deleveraging because deleveraging directly reduced the monetary base. If we want to avoid a deflationary spiral, the missing capital (that is destroyed as credit contracts) must be replaced. This is why I think it’s important to get the money out quickly. It is also why there should be regulatory oversight and limits on lending ratios.

    PS. I love your blog. Keep it up!

    Dan

    February 5, 2009 at 3:49 pm

  6. spot on. This is not deleveraging per se, it is leverage-shifting both in regards to debtor and the time. Naturally there will be some mismatch or we wouldn’t have seen the drastic fall in total market cap, but for most intents and purposes, the government [taxpayers] is [are] “picking up the tab” for the foreseeable future.

    Dan does make a good point about avoiding a deflationary spiral. That said, if market forces are telling us our economy is inflated, perhaps we should let it deflate a bit even if it is painful.

    capitalkid

    February 17, 2009 at 5:52 pm


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