A Trillion Here…A Trillion There
Kurt Brouwer November 24th, 2008
For this post, I’m updating a sarcastic comment the late Senator Everett Dirksen made referring to the casual way that government bureaucrats tossed around the term billion. Many years ago Dirksen said, “A billion here and a billion there. After a while, it adds up to real money.”
Now, of course, we have ramped up to tossing the term trillion around quite casually. Who says we have not made any progress (just kidding of course)? This piece from Bloomberg tallies all the bailout commitments and comes to the grand total of $7.4 trillion.
Fed Pledges Top $7.4 Trillion To Ease Frozen Credit (Bloomberg, November 24, 2008, Mark Pittman and Bob Ivry)
The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”
…Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.
The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.
…”No question there is some credit risk there,” Poole said.
That would be an understatement Mr. Poole. Anytime you take on an obligation that starts with a T as in trillion, that’s a big number and a big potential risk. Just to put the size of this neverending bailout in perspective, let’s compare $7.4 trillion to some other large numbers such as the value of all home mortgages, government debt and consumer debt. $7.4 trillion is:
- 60% of the total value of all U.S. home mortgages (approximately $12 trillion)
- 75% of total U.S. government debt as of year-end 2007 (almost $10 trillion)
- 300% of U.S. consumer debt (approximately $2.6 trillion)
In other words, $7.4 trillion is a big number. The Bloomberg piece continues:
The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.
…President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office.
The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.
I remember the original Chrysler bailout and it was quite controversial at the time. Now, we may have the dubious pleasure of doing it again. I suspect we would have been money ahead just by giving Chrysler’s workers an annuity in 1980 and sending them home. Perhaps if we had let Chrysler fail back then, the other two (GM and Ford) would have gotten the message that their business models needed to change (see More Retirees Than Workers In Domestic Car Companies and Should We Let GM Fail?).
At least, back then, it was fairly clear what the government was doing. Now, we have trillions in commitments with little or no transparency as to who is getting it. The Bloomberg piece continues:
Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.
Collateral is an asset pledged to a lender in the event a loan payment isn’t made.
“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”
The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Co. and a former research economist at the Federal Reserve Bank of Chicago.
“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.
A trillion here and a trillion there and we are not even sure exactly where our money is going.
See also Will The Guilty Pay — In Washington or Wall Street? and Bailout Bonanza for Bad Businesses — Will it ever end?.
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Kurt,
You made a really interesting point: Perhaps if the gov. let Chrysler fail back in 1980, Ford and GM would have learned the error of their ways, and they would be operating under a far different business practice than they do today.
You know I often think about the exact notion in which you wrote about: when did it become commonplace to throw around the word billion? No one seems to be scared of that number anymore…That’s part of the problem.
Another nice post, thanks,
Tim