We have roughly $10 trillion in debt, and we will add another trillion for the "rescue plan." I know it may be optimistic that it does rescue the credit markets and that it is only $1 trillion, but that is what we are looking at now at the time of these debate questions. The $1 trillion rescue money does not come out of the annual spending budget. It is borrowed money, so only the additional interest payments come out of the current budget. The NY Times recently estimated that we would pay $244 billion in interest on the national debt this year, which is about 2.5%. However, people are so eager for the safety of treasury bills right now that we are not even paying that much interest. If the effective rate goes down to 1%, we will save $150 billion in interest that we expected to pay and the bailout cost will only add back $100 billion. We actually come out $50 billion ahead on a current basis!
In addition, this is better than normal borrowing because it is secured. There is substantial risk that when the collateral is sold, the government will realize a loss. However, they could realize a profit as they did with the RTC and during the depression.
To illustrate this to the public, Obama could say its no different than if you have a $100,000 mortgage and then you have to give your kid $10,000 to keep their condo out of foreclosure on the condition that they allow you to sell it. If you borrow the $10k using the condominium as collateral, only the additional $50/mo interest comes out of your current spending. It does not blow the budget.
The problem really is not the cost of the bailout; it is reduced tax revenues due to an economic slowdown. That is why the government needs to spend at least another $150 billion on economic stimulus as Nancy Pelosi has suggested. However, spending it on public works is a better way. If it goes out as tax rebates people will just save it or pay down credit cards. Seeing about a third of their retirement funds go up in smoke just in the last quarter has sobered up America. We are now a nation of savers and will be for quite a while.
I welcome any economics geeks to sharp shoot this analysis. My formal econ education ended with micro and micro at the grad school level and some finance. We need to find a way for Obama to answer this question in a straightforward way that makes sense to the public. I suspect that it will come up again in the third debate.
I’m writing this as I listen to ring tones during volunteer recruiting calls for the Obama campaign, so forgive me for scoring low on the Flesch-Kincaid scale.
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