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$700 Billion

September 20th, 2008 . by economistmom

Right now I understand very little about where the figure comes from, but the figure for today is $700 billion.

Gulp.

UPDATE, 7:30 pm:  This story from The Economist is good at explaining why “the price of stability” may be a lot of uncertainty about the federal government’s exposure–yet why we can still hope that despite the very high cost, that the net benefit of the move will turn out to be positive:

The bail-out plan’s large size is designed to provide meaningful support. As of June 30th, $10.6 trillion of home mortgages were outstanding (the vast amount current). Once authorised, the money may not be spent: mere knowledge of the fund’s existence might restore confidence. And banks don’t have to sell their mortgages to benefit; merely having a credible market price for those they hold could restore the confidence of investors. And if the Treasury is astute in its buying, it could even make money. After all, thanks to investors’ panicked flight to the safety of Treasury debt, it can now borrow for close to nothing.

The Treasury would have to recognise that it could lose a lot of the money too: there’s a reason no one wants this paper. At 5% of GDP, $700 billion would be larger than the net amount spent on the savings-and-loan clean-up in the early 1990s which came to around 3% of GDP. The final price tag of this bailout should be less since the government would eventually recoup some of the money owed on the mortgages. Even 5% of GDP is cheap compared to an average of 16% that banking crises around the world have cost in the past 30 years, according a recent staff study of the International Monetary Fund.

The uncertainty is in how much money will eventually be “recouped” by the government, but I guess we have to focus on 5% being less than 16% and far from a catastrophic loss of GDP.  But how we know that the alternative scenario (or the “opportunity cost”) would have been a 16% loss or worse, I’m not sure.

2 Responses to “$700 Billion”

  1. comment number 1 by: Albert Edwards

    If my understanding of billions and trillions is correct, $B700 is about 7% of the $T10.6 outstanding mortgage debt, most of which is current. Does this mean that a large part of the $B700 is to be used to pay off bad bets?

  2. comment number 2 by: B Davis

    The uncertainty is in how much money will eventually be “recouped” by the government, but I guess we have to focus on 5% being less than 16% and far from a catastrophic loss of GDP. But how we know that the alternative scenario (or the “opportunity cost”) would have been a 16% loss or worse, I’m not sure.

    That was an interesting article in The Economist. However, I wonder if the “average of 16% that banking crises around the world have cost in the past 30 years” refers to all countries or just large, developed countries such as our own. If it refers also to developing countries with much smaller GDPs, then the comparison may be less relevant. In any case, judging from the graph showing debt as a percentage of GDP at this link, a 5% of GDP rise in the debt will be significant.