Bloomberg News reports that the price tag for the bailout being discussed this weekend in Washington just went up another $200 billion. That's if you believed the initial $500 billion estimate bandied about yesterday. According to Bloomberg, the plan will be broken into "$50 billion tranches which would last for at least two years" and would "accept mortgage-backed securities [MBS] and collateralized debt obligations [CDOs]." Since there are $13 trillion such securities out there -- I am not sure whether $700 billion will be enough to buy them all up -- unless this agency buys them at a steep discount.
That $700 billion price tag will increase the national debt ceiling to $11.3 trillion, that's more than double where it was in 2000 and it represents 80% of U.S. GDP. Why is that important? Because in international banking circles any country whose debt exceeds 60% of GDP is considered at risk of not being able to pay back its debt. So the U.S. is surely turning itself into one of the riskiest borrowers in the world. Thus it's too bad that the rest of the world seems to be entirely dependent on what happens here for the global economy work.
And it wouldn't shock me to wake up Monday morning that that $700 billion having hit $1 trillion or more. As the saying goes, when you owe a bank $100,000 and can't pay it back, that's your problem. But when you owe that bank $5 billion and can't repay, it's the bank's problem. That's the way the rest of the world must feel as the U.S. goes out to the beg the world to buy another trillion dollars worth of our national debt.
And here's another little problem: If banks are forced to sell their MBS and CDOs to this new agency at huge discounts, won't they need to write-down their capital to reflect the losses? Will they have enough capital after taking those write-downs?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
Before the bell: Futures higher ahead of housing, jobless data
Nuclear power is on the comeback trail
Apple backs AT&T in continuing spat with Verizon
Reader Comments (Page 1 of 1)
9-20-2008 @ 12:45PM
william lindblad said...
Based on recovery of the 1990's RTC - figure will ultimately be at least 3 trillion.
That is based on the economy stabilizing and that thought is probably a pipe dream.
The intervention tactics are reactive. If the government had been in pro-active mode a year ago, some of this may have been prevented. If they had been in this frame of thought 4 years ago - all would have been prevented.
Call it ignorance or in-action, blame whoever you like, the bottom line remains the same. It is obvious to the oil traders that the currency will lose value and the price of this commodity is now on the way back up. This in turn will create further inflation pressures and the Treasury printing presses can run 24/7 without any effect. When the dust settles, the market is going to take a large dive as reality sets in.
Certain irony here - we had a long "cold war" with the old U.S.S.R. and now those initials fit us. Welcome to the United States Socialist Republic as the government now owns most of the country's business.
9-20-2008 @ 3:37PM
Big Al said...
WOULD ANYBODY CARE TO COMMENT ABOUT THIS LITTLE DETAIL OF THIS BAILOUT PLAN:
Decisions by the treasury secretary related to the buyback program could not be reviewed by any court, according to a copy of the department's draft legislation obtained by Reuters.
????????????????? Is this Man Above the LAW ? Or does he possess divine powers ???????????
9-21-2008 @ 3:54AM
Ryan said...
Bailout ridiculous, and not needed, and only taxes future generations. (And both candidates want to increase govt spending?) NESARA as drafted by Dr. Barnard is the only way out of our fiscal and monetary mess. Force balanced budget, abolish income and capital taxes in favor of 14% sales tax on everything else except rents, groceries, insurance, and medical services; new monetary tools to ensure 0% inflation; abolish compound interest on secured loans in favor of simple monetization fee, and require principals be paid before before banks are allowed to collect on the monetization fee. No payment no matter how small will always reduce a debt to zero, banks more willing to prevent foreclosures and will turn around funds for more loans sooner. No more of this pay for 2.5 houses just to own 1. Pay for just 1.5 and be done with it in 17 years. NESARA (not the hoax, but Dr. Barnard's original version). Google the NESARA Institute.
9-24-2008 @ 10:22AM
Mike said...
Does anyone know where I can find a copy of the draft legislation online?
please email: mphillips@yankeecandle.com
Thank you !!!
- Mike
9-25-2008 @ 11:36AM
John said...
John writes:
Lets cut through the bullshit..and call a spade a damn spade. The bailout gives wallstreet another 700 billion...yes thats about a trillion to squander. The tax payers foot the bill for the bailout and the rich wallstreet powers that be get more of our money to lose again.(say 3 -5 years at best). Come on America its time to take our lumps now and stop deffering the enevitable...let the markets crash so that they can start fresh without taking on an extra trillion in debt that will now doubt be squandered.Let the global markets feel the effect of our nations woes so that they might finally appreciate what we have provided for them...( a market to trade in ).90% of us will still go to work once the (big scary boogie man) takes his toll on the markets. So nothing will really change for Mr. and Mrs. Middle to Lower class America. Notice that the only people preaching doom and destruction are the people who make more in a day than you or I do in a lifetime.
( or say 20 years). Wake Up for Christ sake!!!
Isnt anyone else tired of being whipped by Washington and Wallstreet? "Lets spend 4 billion a week to make "democracy" in muslim nations....Lets spend 700 billion and keep the status quo of the rich getting super rich and the working class going broke"...If our founding fathers could see the shit thats going on they would arm themselves and start hanging the crooks and treasonist bastards responsible for crushing our nation. They sure wouldnt hand them money to keep doing it. In case you havent read the Constitution or maybe you just dont think it applies to reality...we ( Civilian Americans) have the RIGHT to bear arms and overthrow our government when it becomes "oppressive". If being handed a 700 billion dollar bill without being told how its going to be spent isnt oppressive than I really dont know what else to say. Imaging "Changing Washington" by removing everyone there, starting new and letting the so called financial experts that created this mess take responsibility for it. So they go broke, big F'in deal. Who isnt?
Read your history. We went to war with England for less than what we are being asked to endure.
9-26-2008 @ 10:19AM
tgreene said...
Now I am not an ecomonist, but I know the dangers of letting BIG government fix BIG banking. This is a no braner and should not happen.
Bottom line is once again we are running full on to intercept a possible problem that the crooks of Washington are saying is in "our best interest". (Where have I heard that before).
All this is, is nothing more than a way for the governemt to take more control. And they have no clue what they are going to be controlling, what it will cost, or what the long term effects of doing so will be.
Seeing that we the tax payers are footing the bill, I say we create a privately held entity that controls this revenue. That privately controlled entity determines what is funded and what is not. With monies being distributed for a return shareholding of said funded entity. And in return, all taxpayers for the year 2008 get stocks in this company. In 6 months the company goes public to be traded as "our", the taxpayers big bank.
This company does not start out with a 700billion line of credit. It starts out with a 250 billion line of credit and can seek additional funding upto 700 billion over the period of 6 months.
An entity run by the people for the people to enssure "our" future. Not some bonehead in Washington that will eventually end up with deeper pockets because of this debacle.
9-28-2008 @ 7:39PM
Joyce said...
How much money are they borrowing from Social Security this time and when are they going to pay back what they have already borrowed ?