Bailout Numbers in Perspective

Small Business & Entrepreneurship Council | Raymond J. Keating | September 26, 2008

When it comes to tallying up the federal government’s recent bailout announcements, the numbers are so staggering that they might seem unreal to many people.

For Bear Stearns: $29 billion.
For Fannie Mae and Freddie Mac: $200 billion.
For AIG: $85 billion.

And now, of course, Washington debates Treasury Secretary Hank Paulson’s $700 billion to bailout financial firms that made bad debt decisions.

That’s $1.014 trillion in taxpayer money placed at risk. (And there’s the $25 billion loan package-bailout moving through the Congress for automakers.) Unfortunately, since there is no substantive analysis to back up the $700 billion the Treasury wants, the bill may go even higher.

But let’s take $1 trillion as the number for now, and put it in perspective. For example:

• That $1 trillion equals 7 percent of the annual U.S. GDP.

• That $1 trillion comes out to nearly $3,300 for each man, woman and child in the U.S.

• That $1 trillion roughly equals the nonfarm proprietors’ portion of total personal income.

• That $1 trillion equates to more than 70 percent of after-tax corporate profits.

• That $1 trillion equates to about 70 percent of private nonresidential fixed investment.

• That $1 trillion is more than three times the expected level of corporate income tax revenues for fiscal year 2008.

• That $1 trillion comes up just short of the $1.17 trillion expected to be taken in through the personal income tax in FY2008.

• That $1 trillion is about $100 billion more than the expected FY2008 revenues for Social Security.

• That $1 trillion is 65 percent higher than the federal government will spend in FY2008 on national defense.

Hope that helps to put this entire government bailout scenario in perspective.

Raymond J. Keating, Chief Economist


3 thoughts on “Bailout Numbers in Perspective”

  1. I understand how astronomical these numbers are, but unfortunately, no one is explaining why these numbers are necessary or how this enormous bailout is supposed to benefit the American taxpayer.

    Why $700 billion? Where exactly is the money going? To what banks/institutions? Will this assistance in any way guarantee that banks will continue lending? The problem is that they should NOT continue lending in the manner in which they were: subprime lending is considered risky for a reason. Lending standards need to be stricter, not more lax.

    The other thing is that there are banks with solid assets: JP Morgan Chase being one of them. In fact, the collapse of these Wall Street titans may make the ones who survive that much stronger: Chase has now acquired all of WaMu’s customers. How many dollars in assets did they just acquire?

    I’m tired of how this economy is subservient to the irrational whims and practices of Wall Street where little is based on sound evidence and conservative, sober assessment of facts but is often based on speculation, trends and hype and where the hard-earned savings of millions of investors are held hostage to the juvenile practices of traders who jump on every bandwagon that comes down the pike.

    I’m not a financial wiz by any stretch, but I can think of numerous, less costly ways of solving this crisis: what about encouraging the surviving banks to continue lending through some form of financial incentives? Heck, provide a $50 billion gift to the top 5 banks who were more cautious in their lending.

    I just don’t know on this one. The last eight years of this administration have been the same: create a panic and feeling of general hysteria and increase the powers of the federal government with no more explanation than “you need to trust us! Doomsday is near”. Every year, there’s another “red alert” crisis that requires an increase in government reach.

    It’s funny how the Dems are labeled as “big government”, given the circumstances.

  2. Despite today’s drop and the hit my weathered 401K just took, perhaps we need not be as negative about this.

    Yes, home prices are declining. I’m not sure this is necessarily bad news, although it will unfortunately hit those whose timing was poor or who simply fell into bad financial straits. They simply could not continue on the upward trend they were, and I don’t understand why this trend was accepted with complete unquestioning enthusiasm by Wall Street for the last several years. When incomes remain stagnant and home prices increase at a rate that far exceeds inflation, what happens? This seems like elementary economics to me. Within a few years, you have home prices that are priced out of a range that anyone can afford. So now, the market’s correcting itself, and perhaps within a few years, home ownership may be possible for more people and Californians might actually find a 2-bedroom condo for less than $450K. This isn’t a good thing?

    But of course, here we are with the largest one-day decline in memory. Does Wall Street know how to do anything but over-react? Based on … speculation! Again, if cooler heads prevailed, they’d take a more sober assessment of today’s economy and the companies that are STILL reaping profits. Instead, the dolts on Wall Street have immediately wiped out perhaps billions of dollars in assets.

    In terms of the slowing of lending: again, there are banks with assets who continue to lend. Most transactions on any given day are not credit-based with the exception of homes and vehicles and thus, consumer spending will continue. Credit should still be extended to credit-worthy customers. Perhaps here is where the government can step in and provide some measure of security or incentives to continue to lend (outside of simply buying their bad debts). The banks will have no choice as I see it. If they completely refuse to extend credit to anyone, not only will they have debt but their revenues will dry up.

    I’m interested to hear other p.o.v’s on this however. Perhaps I simply don’t understand the problem here.

  3. James K.:

    The problem is that they should NOT continue lending in the manner in which they were: subprime lending is considered risky for a reason. Lending standards need to be stricter, not more lax.

    Don’t worry. Subprime lending has gone out of style. The current problem is the opposite of what you seem to think it is: Banks are hardly lending at all. Not to each other, not to businesses, and not to customers with good credit. This is called a credit crunch. It can bring commercial activity to a dead stop. That is why the market is falling.

    There are two ways out of this problem. Create liquidity by printing massive amounts of fiat currency and sticking taxpayers with massive government “bail-out” programs (and printing more money to pay for them) in hopes that these measures will ease the credit crunch. Everyone, of course, will pay for this fix due to resultant inflation. Or, liquidate the toxic assets and get the poison out of the economy so it can grow again, with the up-front cost of a severe recession or depression. The leaders of both parties seem to favor the former (inflation) over the latter (recession), but there is no good option here.

    “Does Wall Street know how to do anything but over-react?”

    “Every year, there’s another ‘red alert’ crisis that requires an increase in government reach.”

    Maybe this is not a government conspiracy, but instead we are seeing chickens come home to roost. Perhaps there is a real crisis. We’ve had about forty years of massive deficit spending combined with government meddling in the markets (mandating lower lending standards so high-risk, low-income Americans could get loans, resulting in increased supply of liquidity, higher prices, and bad loans – and other similar meddling in other areas). The root cause of these difficulties is the desire of American individuals and politicians to obtain things they cannot afford. We’re addicted to knick-knacks, cheap electronics, and such, and it seems a lot of folks want the government to take care of them if they make stupid decisions. The day of reckoning for this behavior is inevitable. It is just a matter of time.

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