The Homa Files

Excerpted from WSJ: “What’s the Real Cost of the Bailout?”, Sept. 26, 2008

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Assume Hank Paulson gets his $700 billion appropriation.  And, assume he then spends it all, immediately, buying up the financial toxic waste that is rapidly destroying the banking system.

How much would that actually “cost” taxpayers?

The Federal government pays just 4.34% interest on long-term, 30-year loans. So the government could borrow this money for 30 years at a cost of just $30 billion in interest per year.

To put that in context, that is about one-fifth of 1% of our gross domestic product. One-fifth of 1%.

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Obviously, the story doesn’t just end with the interest cost. When you take out a loan, you’ve got to be able to repay the principal in due course as well.

Let’s take a worst case scenario. Let’s imagine Uncle Sam borrows $700 billion to buy these assets and never gets a single penny of it back. Let’s imagine this paper ends up completely worthless. So instead he has to tap taxpayers to pay off part of the principal every year for 30 years, until the loan is all redeemed.

How much would that cost per year?

Try $42 billion. That’s the interest and principal repayment.

That’s less than one-third of 1% of our annual gross domestic product. That’s the true, annual cost of this bailout. Not $700 billion.

And that’s the worst case scenario. That’s assuming Uncle Sam never gets back one penny on these assets. In reality, the Treasury will certainly get some of its money back and will probably get most.

It may even make a profit. Someone with deep pockets, the ability to borrow long-term money for just 4.34%, and the expertise to analyze today’s distressed mortgage market could make an absolute killing here.

Full article:
http://online.wsj.com/article/SB122245659564179649.html

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Ken’s POV

The author’s “worst case” is hardly the worst case. The worst (and most likely) case is that the $700 billion becomes a permanent layer of the national debt, i.e. any potential pay-down just gets diverted incrementally to other spending programs.  If so, the full cost of the program is the value of the perpetual annuity stream of interest payment — which is $700 billion [$30 / 4.34%].

Why is the worst case the most likely?  Think Iraq spending — the $10 billion per month.  It was originally ex-budget. Now, at least one presidential candidate is talking about repatriating the $10 billion per month into domestic spending programs.  Suddenly, ex-budget becomes on-budget.

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This entry was posted on September 28, 2008 at 6:47 am and is filed under Government & Politics, Mortgage Crisis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.