$700 billion for a bailout plan sure sounds like a lot. But economists don’t think additional US Treasury debt in that amount would put much of a strain on the economy.
Many, including Cary Leahey of Decision Economics, warn the price of not passing such a plan would be steeper. He estimates that for American workers, inaction could mean hundreds of thousands -- if not millions -- of layoffs. That’s serious.
However, it is harder to get a read on the potential long term negative aftershocks for the economy, including the risk of inflation.
As a general rule, large government deficits push down the value of a currency and raise the risk of inflation. But economists say it’s not always that simple.
Some people even see the possibility of a deflationary scenario. They argue that if there’s increased government oversight of financial firms, lenders could become more risk-adverse and stingy with credit. That, in turn, could force consumers and businesses restrain spending -- leading to lower prices overall.
There’s even debate over the impact on the dollar. If the Fed has to print money to pay its debt, it would dilute the value of the dollar. But the U.S. government does not intend to finance the plan by simply printing more dollars. And, as Lakshman Achuthan of Economic Cycle Research points outs, there’s the possibility foreigners might perceive US securities to be more attractive than those in other countries, where the governments aren’t taking action to prop up the banking sector.
No one is saying a $700 billion rescue plan is good for the economy. Certainly that money could be used for more direct public good, like schools and health care. But the consequences for the economy may not be quite as negative as I and others may have feared.
Comments
Rise liquidity in liquid lingerings,
Like watery words awash; like meanings
said By repetitions of half-meanings.
~ Wallace Stevens ~
During bleak 30’s when seldom used auto-batteries were dying, Huey Long invented the *economic jump-start* for his dusty Louisiana. Within today’s opulent affluence our wise legislators have resurrected the *liquidity dream* but now as a *preemptive kick-start*. For a mere $700,000,000,000.00 of our money they promise to find our hog and kick it over.
Whoawoawoah
!
Any deficit, by definition, creates a demand for loan-funds. The larger the deficit, the higher interest rates will be, or the less they will fall.
Any given deficit should be evaluated in terms of: (1) the size of the deficit in the context of the size of future deficits, and the accumulated debt relative to the means and costs of financing the whole: (2) how the deficit is financed: (a) from savings or (b) commercial bank credit, i.e., newly created money; and (3) the purpose for which the deficits are incurred.
Prorating the federal deficits over the entire spectrum of federal expenditures, it can be said that virtually all of the current deficits are attributable to defense spending, military and civil service pensions, interest on the debt, and welfare and unemployment benefits. Social security for now is not include in the above list since only a very small proportion of social security benefits are financed from non-social security taxes. From an economic standpoint, only interest is “untouchable”.
If current projections of Federal Deficits materialize in this, and the next few years, interest rates (both long and short-term) will be driven up sharply by the increased demand for loan funds. I.e., any recovery in the economy will present a “Catch 22” situation. An upturn in the economy will add increased private demand for loan funds to the insatiable demands of the Federal Government. The consequent rise in interest rates will effectively abort any recovery.
Raising taxes to accomplish a reduction in the deficit would be counter-productive. Most of this debt is short-term. Combine this with the factor with the constant roll-over of some of the long-term debt and it becomes obvious that the burden of higher interest rates will be compounded. The burden becomes a function of the major portion of the debt, not just the current deficits. The burden, in fact, becomes exponential. In other words, if the trend is not stopped, the debt inevitably has to be repudiated.
It would seem that somewhere, somehow, if total net debt (not just Federal Debt) keeps rising faster than production (Real-GDP), the burden of interest charges at some point now indefinite and unknown, but nevertheless real, will become too great to carry.
It would seem that somewhere, somehow, if total net debt (not just Federal Debt) keeps rising faster than production (Real-GDP), the burden of interest charges at some point now indefinite and unknown, but nevertheless real, will become too great to carry.
To the The Birk Economic Recovery Plan please re-check your math $85,000,000,000 / by 200,000,000 taxpayers (We will leave off the .00 cents)I beleve this is a total of $425 four hundred twinty five dollars for each taxpayer I could be wrong.
The Birk Economic Recovery Plan
This is brilliant--I had not heard of this before. This guy should at least get nominated for a Nobel Prize in economics. Even if the numbers are skewed a little, the point is well made. Let's face it, the economy only works when money is circulating--it must change hands. Spending is to be encouraged--within your means. Read on...
"Subject: The Birk Economic Recovery Plan
I'm against the $85,000,000,000.00 bailout of AIG.
Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+. Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billon that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.
Of course, it would NOT be tax free. So let's assume a tax rate of 30%. Every individual 18+ has to pay $127,500.00 in taxes. That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket. A husband and wife have $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads
Put away money for college - it'll be there
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs
Invest in the market - capital drives growth
Pay for your parent's medical insurance - health care improves
Enable Deadbeat Dads to come clean - or else
Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed
Forces.
If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( "vote buy" ) economic incentive that is being proposed by one of our candidates for President.
If we're going to do an $85 billion bailout, let's bail out every adult US Citizen 18+!
As for AIG - liquidate it. Sell off its parts. Let American General go back to being American General. Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can "never work." But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC .
And remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned
instantly in taxes to Uncle Sam.
Ahhh...I feel so much better getting that off my chest.
Kindest personal regards,
Birk
T. J. Birkenmeier, A Creative Guy & Citizen of the Republic
PS: Feel free to pass this along to your pals as it's either good for a laugh or a tear or a very sobering thought on how to best use $85 Billion!!
P.P.S. Even if the number is 250 million adults, the share is $340,000 gross each!!! ($238,000 net after that estimated 30% federal tax rate). Your state and local governments will want "their share" too, but think of all the pre-financed public works projects that could get done. More jobs! Repave streets and upgrade utilities--that needs labor, and equipment and materials.
This is way better than "trickle-down" economics--it would be "tidal wave" economics!
Make sure the $25 billion that goes right back to Uncle Sam gets used for debt reduction.
PPPS--I heard on the radio that the total of all recent and potential near-term bailouts may reach $500 billion. Put another way, half-a-trillion dollars. Or 500,000 million!
Winifred -- You raise some interesting questions, and I'm not commenting to judge them. Just wanted to point out McCain's history. When he was POW, his father was an 4-star Admiral in charge of U.S. forces in the Vietnam region. Needless to say, the capture of a 4-star Admiral's son received a lot of press attention at the time, hence the photos.
Isn't this bail out sort of like the entry into the Iraq war. "We must do this NOW, or else...." We all fell for it then are we about to do the same again? The tool is fear and it works.
I also wonder how McCain had all these pictures taken of him when he was a prisoner of war, was he someone important there? What about all the other wounded soldiers, did they get this kind of visibility too? - I do admire his guts, however, aren't there thousands of veterans across the country (maybe millions if you go back far enough) that we hear nothing about. He was one of the fortunate ones, he came home and he came home with his mind functioning. I'm not sure he should be using this experience in his life to promote himself as a competent president?
IF YOU ASK ME , BURN YOUR MONEY ,
ITS NOT FREE , THEN VOTE FOR FREE ,
FREEDOMFREE .
Clarification - by history I meant - on Oct 26, 1998 per Business Week - Under enormous international pressure, Japan's Prime Minister Keizu Obuchi is embarking on a massive bailout of its banking system. Some $510 billion will be set aside to cover depositors, inject capital into ailing banks, and effectively nationalize the insolvent ones. The up-front money for the salvage operation represents about 12% of Japan's economic output--a commitment that dwarfs the money spent on the U.S. savings and loan crisis. How will the plan work in practice? And will it restore Japan's crippled banking sector to health? businessweek dot com - 1998 - 43 - b3601106- htm - the answer was - No the bailout did not work, just a morphine injection for a sick banking system.
I remember not so long ago - (2002?) California had no power, the grids were failing and the sky is falling etc - it turned out to be a scam. Then in 2003 - there were WMDs in Iraq to blow us off the face of the map - the sky is falling - we must act very very soon - it turned out to be a scam.
My point is - history proves this is not a viable solution, but is simply just another GOP scam!
You might be interested in reading this letter which I just wrote to Sec. Paulson, Pres. Bush, and my state's Congressional delegation:
Just Say NO to the Paulson/Bush/Bernanke Bailout Plan
I may in the near future (but don’t plan on leaving for the fall congressional vacation before mid October) give you my approval for an appropriate partial bailout, but the obscure and vague “Trust us. We know what we are doing.” ultimatum is entirely unsatisfactory.
I have spent many hours on the internet (associatedpress.com and its member online newspapers, cnbc.com,Washington Post, Wall Street Journal, and many other such NON-Mickey Mouse opinion web sites) reading every bit of information which has leaked out of the too-much closed discussions of this Bush Administration Plan. I have not been able to find sufficient substance to go along with the “we must do it this week” hysteria. It’s not that I am unable to understand the economic arguments, (I have two earned Masters Degrees in Mathematics.) but the point by point details and the discussions which you have had concerning them have not been available to us–the general public.
The hurry-hurry ultimatums from the administration are not reassuring and they are no substitute for rational discussion by us common people about the possible negotiations with you in Congress and in the White House. They also are no substitute for our understanding of the possible outcomes. If the President wants us citizens to accept and support his plan, then he must offer more specificity, more openness, and a little more time to be sure that we understand the entire offer.
I am sure that you want to be a friend of your constituents and a help to the citizens whom you represent. Then I am sure that you will urge your congressional and administration colleagues to take it slowly enough to let us citizens truly know what you are considering.
Until I can read the various forms of the proposed legislation which are being discussed I will be against the bailout in ANY form. After the next-to-final form of the bill is set out in print (every newspaper and many media sites will want a chance to publish it) I expect that you will allow at least 72 hours (during business days of the week) for public discussion and input from folks just like me before the ultimate version is sent up for a vote.
This is not a time for secrecy nor for Washington insiders (nor Wall Street insiders) alone. It is not a time to keep citizens in the dark by steamrolling legislation at a panic pace. Without the opportunity for ALL Americans to have productive discussions over all parts of this plan for 72 or more hours I will NOT give my approval.
Without the UNDERSTANDING and the APPROVAL of the American people, passing this Paulson/Bush/Bernanke Plan will be a case of grand larceny.
I tried to get a handle on how much this new debt is. What I found was $700B about equals our annual trade deficit and is roughly twice the amount we pay in interest on our national debt. The new $11.5B debt ceiling represents 1.5 times the median income($50K)for all wage earners. Outstanding Medicare, Medicaid, and Social Security obligations are $50B. By some estimates the mandatory payment obligations will exceed income in 25 or so years.
A bailout is not necessary for protection of the
financial system, receivership is a time tested
method of resolution for insolvent institutions.
In receivership, the companies continue business
as usual, under the control of a court appointed
receiver, while the assets as sold off to pay the
creditors. In this case, bond holders would be
paid a portion of their investments, while very
little or nothing would be left for shareholders.