Beg, Borrow, or Steal

Why the bailout is a terrible idea

Steve Chapman | September 29, 2008

Sometimes bipartisanship is grounds for celebration, but more often it is cause for tears. Last week, congressional leaders from both parties went into a room to hammer out a plan that would put taxpayers on the hook for $700 billion. But they assert that the investment is essential to the health of the economy. And they insist that if we make this investment, we'll get all or most of it back.

This promise would be more believable if the federal government had a long record of using tax dollars responsibly. In fact, it's the equivalent of the guy who raids his kid's piggy bank to feed the slots. The most notable impulse of our leaders is spending money the Treasury doesn't have, piling up bills that future Americans will have to cover.

How do our leaders intend to pay for this massive new outlay? Not by raising taxes. Not by cutting spending in other parts of the budget. No, they will borrow the funds. The Chinese and other foreign investors will lend us money so we can keep the economy humming, which will allow us to make the payments on the money we already owe them.

Unfortunately, this deceptively pleasant process can go on only so long. Today the federal government wants to bail out an industry that can't meet its obligations. But it increases the chance that the next time, it will be the federal government that teeters on the brink of financial doom.

The $700 billion comes on top of $85 billion it is lending to save the insurance company AIG. It's in addition to the $200 billion it put up for mortgage giants Fannie Mae and Freddie Mac. There may be more on the way.

Add it all up and you find that our government has suddenly run up a trillion dollars in new liabilities. That sounds like a lot—unless you compare it with Washington's other outstanding commitments. Currently, the national debt stands at roughly $10 trillion, which is about three-quarters as large as our entire annual gross domestic product. But The Concord Coalition, a Washington-based fiscal watchdog group, says explicit and implicit obligations amount to $53 trillion—"almost as much as today's net worth of all household assets."

Hear that? Everything you own is already spoken for.

With each year, government spending rises, and the budget deficit gets bigger. As the baby boom generation retires, the gap will grow. Given current trends, federal outlays stand to double between now and 2050, while revenues remain roughly stable.

By then, two programs—Medicare and Medicaid—will cost as much as the entire federal budget does today. Which means that, essentially, we'll be financing two federal governments. If you dislike carrying a defensive end on your back, wait till his twin climbs aboard.

Even the government admits this can't go on forever. A report from the Treasury Department says that without big increases in revenue, "Medicare, Medicaid and Social Security spending and the related deficit financing costs will far exceed the government's ability to pay."

When you spend more than you bring in, you have to borrow to cover the difference. In the next three decades, the government's official debt is on track to triple. But at some point, the Treasury predicts, "the world's financial markets would likely cease lending to the United States."

Then what? David Henderson, a research fellow at Stanford's Hoover Institution and editor of The Concise Encyclopedia of Economics, ticks off the options: We could close the budget gap by drastically cutting spending or raising taxes. The Federal Reserve could print a lot of money, reducing the real value of the debt and making it easier to pay off. Or the government could default—in short, declare bankruptcy.

It may sound absurd to think the United States government would ever walk away from its debts. But if we are not willing to make painful sacrifices now, why would we be willing to make excruciating ones then? Inflation, says Henderson, is also unappealing because it would cause such pain here at home. Default would be more attractive to some Americans because we not only would escape our debt but also "would be screwing foreigners."

Once they have rescued the financial sector, maybe Henry Paulson and Ben Bernanke can answer the question that will eventually follow from this and other commitments: Who will rescue the federal government?

COPYRIGHT 2008 CREATORS SYNDICATE, INC.

Comments

JMR|9.29.08 @ 7:17AM|#

For some morning humor (and a dose of what's becoming typical antilibertarian media bias) watch the Fox News droids laugh as Peter Schiff states the obvious. Hmmmmm. I wonder who's laughing now? (I really love YouTube sometimes, and now's one of those times!)

Suck Warren Buffets Dick|9.29.08 @ 7:28AM|#

Look at How AIG posted a dividend on 9/3 and two weeks later they are asking the federal government for money. Then the SEC makes shorting illegal and persecute "unjust profit" it must be nice to suck Warren Buffets dick.

|9.29.08 @ 8:16AM|#

Are you sure the Hadron Collider didn't alter the fabric of the universe? This has got to be the best article Steve Chapman has ever written. Not that it's the best I've read on the subject. But it's the best I've read from Steve on any subject.

|9.29.08 @ 9:01AM|#

Nah, it couldn't be the Hadron Collider, that's already broken.

I think they let Chapman right up the article on this to throw him a bone. Taking pot shots at this bail out is easy. I think another writer could've done a much better job on it. Wracking up the federal deficit isn't nearly as scary as the gov't becoming the backer of the markets or the now explicit statement that risks are socialized.

Also, it isn't a trillion dollar outlay, the cost will be much different. See other (better) writers to get an understanding of the real costs involved although it'll depend a lot on the implementation of this plan, which is a big grey area now.

Nick M|9.29.08 @ 9:03AM|#

David Henderson, a research fellow at Stanford's Hoover Institution ... The Federal Reserve could print a lot of money, reducing the real value of the debt and making it easier to pay off.

I would assume that we would be using dollars to buy back the debt. So I don't see how this could help.

|9.29.08 @ 9:07AM|#

"...editor of The Concise Encyclopedia of Economics, ticks off the options: We could close the budget gap by drastically cutting spending or raising taxes. The Federal Reserve could print a lot of money, reducing the real value of the debt and making it easier to pay off. Or the government could default-in short, declare bankruptcy."

I want to analyze this.
Option 1: Cutting spending and raising taxes--we will likely only see taxes raised. Look at the demographics, Baby boomers are aging and old people vote. The politicians will pander to them at the expense of us younger folk. They won't cut spending but will raise payroll taxes.

The other major Fed. expenditures are War and Debt service. These both have bigger lobbies than we young people do, so guess who'll get screwed.

Option 2: Print money deflating the debt--this simply can't happen. When our debts are all set in T-bills or other fixed interest instruments this is indeed possible. However, our obligations are to Social Security and Medicare/Medicaid. These are pegged to inflation, so inflating the problem away is not possible. How Steve could think this applicable to our current situation is amazing.

Option 3: Declare Bankruptcy--The financiers have a very powerful lobby. So long as money is desired and needed for re-election the financiers will be able to pay off our legislatures millions for the debt service return of Billions, ney Trillions.

So there you have it. Look at the demographics, look at the winds of influence that blow. The powers that be will put this burden on our young shoulders for quite sometime. We don't vote, don't care and will get screwed.

Jogay|9.29.08 @ 9:09AM|#

From a political standpoint, how stupid is McCain that he's going to vote for this crap? While some people think that the bailout is a good idea, absolutely NO ONE would base their vote solely on their support for the bailout.

However, there's got to be at least hundreds of thousands of people (if not millions), who'd enthusiastically vote for a candidate just because he stood up to this bill.

|9.29.08 @ 9:27AM|#

I, for one, look forward to the coming meltdown. I have my sawed-off shotgun, my last of the V8 Interceptors, and my faithful dog ready; and if you want someone to drive that tanker, you talk to me.

|9.29.08 @ 9:40AM|#

From a political standpoint, how stupid is McCain that he's going to vote for this crap?

The Republicans throw away yet another opportunity to both (a) do the right thing and (b) get on the right side of the voters. What a bunch of morons.

Mike Farmer|9.29.08 @ 9:54AM|#

I agree -- the Republicans have blown it. I'm going back to my position that both parties are perpetual losers heading for collapse -- a good thing long term, but a lot of desparate floundering in the meantime.

Surely a viable third party will arise from all this.

Ironic|9.29.08 @ 10:16AM|#

"But as Steve Chapman writes, this will only increase the chance that next time, it will be the goverment itself teetering on the brink of financial doom."

Would it be a bad thing if te government itself was on the brink of financial doom? They might actually have an excuse to limit themselves to only those things the U.S. Constitution permits them to do.

Ironic|9.29.08 @ 10:18AM|#

"The Republicans throw away yet another opportunity to both (a) do the right thing and (b) get on the right side of the voters. What a bunch of morons."

Another good reason to vote for Charles Jay.
http://www.cj08.com/

JMR|9.29.08 @ 10:26AM|#

Charles Jay is tempting because his candidacy says "fuck you" not only to the Democrats & Republicans, but to the Libertarians and the antilibertarian-biased news media, all of which need to hear it at once from me.

Libertarian-biased news media|9.29.08 @ 10:40AM|#

Have fun with that, JMR.

John|9.29.08 @ 10:51AM|#

Can we send the entire country to credit counseling? If you put it in credit card terms, we have a choice this election between who will spend the most while fighting to have the minimum payment made lower. I would ask why people don't have a problem with this increasing debt load, but just look at how the average American uses credit cards. Gasp! They spend more, pay less, and then have a heart attack when the bill comes due.

I'm about ready to pull a dine and dash on my fellow citizens. "Hey guys, I left my wallet on the sailboat. I'll be right back."

Citizen Nothing|9.29.08 @ 10:51AM|#

So are Charles Jay and Wayne Root mortal enemies? Seems like, given their backgrounds, they must have run into each other a few times.
Cage match, anyone? We could let them handle the gambling end themselves.

Robert Enders|9.29.08 @ 11:05AM|#

What happened to the last superpower that made really bad economic policy while involved in a protracted war in Afghanistan?

|9.29.08 @ 11:19AM|#

"""Can we send the entire country to credit counseling?"""

I don't think the government wants that. One of the reasons they say the bailout is necessary is to keep the credit flowing. Irresponsible credit has helped drive the economy.

"""They spend more, pay less, and then have a heart attack when the bill comes due.""""

I couldn't agree more. If we increased the mimimum payment to something more responsible, we would be doing to the credit card holders, what the varible rate mortgages did to home owners. Make the payment out of reach, then major defaults.

I'm pretty much convinced that this problem is about a market built by irresponsible credit, and the solutions the government is discussing is about keeping irresponsible credit alive. If we all learned how to use credit responsibly today, few place would be able to lend tomorrow due to lack of borrowers. Isn't the lack of borrowers what the government is trying to prevent, but on the lending side?

|9.29.08 @ 11:31AM|#

Wrong, wrong, wrong. Increasing US liabilities $1 trillion to buy $1 trillion of assets does NOT mean throwing $1 trillion down the crapper. Chapman is implicitly making this ignorant assumption in his article.

Additionally, the $85 billion credit provided to AIG was done at amazingly favorable terms to the gov't. As a result, not only did this action prevent the chaos that would have ensued had AIG defaulted, it also will with high probability generate nice returns for the gov't-now-turned-hedge fund. The Paulson plan could have a similar effect (see Barron's cover article for more on that).

|9.29.08 @ 12:05PM|#

"""Wrong, wrong, wrong. Increasing US liabilities $1 trillion to buy $1 trillion of assets does NOT mean throwing $1 trillion down the crapper"""

Maybe, maybe not. It depends on how those securities perform after the government buys them. It is using 1 trillion to bet on poor performing mortgage securities. We are using tax payer money to double down on a bad bet. In the name of keeping the credit door open. There is no crystal ball to see what the outcome will be. But the money is at risk of being lost, or greatly reduced.

If the securities were a good buy we wouldn't need a bail out.

|9.29.08 @ 12:19PM|#

Wrong, wrong, wrong. Increasing US liabilities $1 trillion to buy $1 trillion of assets does NOT mean throwing $1 trillion down the crapper.

Your statement makes the mistaken assumption that the government will get a trillion dollars worth of assets when they spend a trillion dollars.

The only reason those assets are illiquid is because the banks that hold them aren't willing to take what they're worth. The entire purpose of the bailout is to let the banks off the hook for their poor decisions, by buying assets for vastly more than they're worth.

If I put a gun to your head and sell you ten pounds of bullshit in a five-pound bag for a trillion dollars, you don't have a trillion dollars worth of fertilizer.

-jcr

|9.29.08 @ 12:22PM|#

What happened to the last superpower that made really bad economic policy while involved in a protracted war in Afghanistan?

The Russians were a corrupt, oligarchic kleptocracy before they went into Afghanistan, nothing like . . . Oh, never mind.

Silent Owl Scribe|9.29.08 @ 1:38PM|#

I agree with this article so much...our federal government in which its leaders are suppose to represent us, the people of the United States, are going to pass the bailout legislation. I have always disagreed with this plan because of principle (believing in a Libertarian way of government). I have little trust in our elected leaders as it stands right now. $700 billion? Please! As noted, already over a trillion ($ 1 trillion dollars) in new debt that must be repaid. Somebody, save our republic! No, no...we can not say that...no, no. We live in a democracy...even as you will never find the term "democracy" in the U.S. Constitution.

Ska|9.29.08 @ 2:05PM|#

The WSJ is now saying that the bill is not going to pass according to the current vote count.

bill|9.29.08 @ 2:12PM|#

I thought that FDR declared bankruptcy in 1933? The US has been in default since then.

Mike M.|9.29.08 @ 2:18PM|#

Breaking news: the House has just killed the bill in its current form, with significant Nay votes on both sides of the aisle.

Sometimes the good guys win.

|9.29.08 @ 6:14PM|#

"Sometimes the good guys win."

Ok, so who's winning here? Equity markets down big, and credit markets even more screwed up. How do I benefit from that? I can't borrow against my house, it's value will likely keep plummeting, my job prospects just got worse, and if I had any money in anything but cash, it's now worth less. Gee, I'm so glad I've been saved from the Salinist bailout. WTF???

|9.29.08 @ 6:48PM|#

If you were really born skeptic you knew your inverstments were at risk as soon you bought them, including your house. But it hurts to lose.

People said the same thing about their portfolio's, heavy with dotcom stocks, when that bubble broke.

I've invested in a stock that sunk to shares per penny, not even pennies per share. Toliet paper was worth more. I was smart enough to only bet money I could lose, good thing because I did.

That's the kind of wisdom we need now, don't bet taxpayer money if the tax payer can't afford losing it. One of the most stupid moves anyone could do is borrow money to play the stock market. That's exactly what the government proposes.

sage|9.29.08 @ 9:04PM|#

What TrickyVic said.

People need to change their behavior. I don't, because the only debt I have is my mortgage. But gee, I didn't go out and get an ARM without thinking that just maybe, the interest rate might go up AND real estate prices might go down. Apparently I'm a rare breed.

|10.1.08 @ 1:48PM|#

The demographics are operating against us. After 2050, the world's population starts to decline, even in Africa, and the developed countries are all going to look like nursing homes. For the time being, we can afford to have the Chinese and the Arabs do our savings for us; what happens when the Chinese have to cope with their own retirees (hundreds of millions of them)?
Like the man says: Hope I die before I get old.