Tuesday 23 September 2008

Final net cost of Fed bail-out - $20 trillion?

Denis Cooper (via email) has been doing some digging...
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I notice that Ambrose Evans-Pritchard has repeated the canard that US taxpayers profited from the last major debacle, the Savings and Loan crisis:

"The RTC was created in 1989 to absorb the bad debts from the Savings and Loans crisis. The assets of the bankrupt lenders were taken over by the state, preventing fire-sales that can drive prices even lower in a self-feeding spiral. It worked well enough. The RTC sat on the devalued assets until the bloodbath was over. In the end it made a nice profit."

I wish somebody would tell him that is definitely NOT the case that "In the end it made a nice profit" - see here, here, here, or here.

US taxpayers are still paying for that bail-out, and their children will also be paying for it until all the extra US government borrowings have been repaid with interest. The final net cost remains unclear, but it will be somewhere between $166 billion and $500 billion, depending on how much interest is added.

Initially it was estimated that the Savings and Loan bail-out would need between $30 billion and $50 billion of taxpayers' money, but in the event it turned out to be more like $400 billion - say ten times as much...

If that was repeated this time round, the $1 trillion presently being talked about would eventually turn out to be $10 trillion, and the taxpayer would lose twice as much once all the "toxic assets" had been bought, and gradually sold off at less than the purchase cost, and then the necessary US government debt had all been paid off with interest - ie, the final net cost to US taxpayers could be as much $20 trillion spread over the next 30 or 40 years.

That may seem impossibly high, but the US GDP was $13 trillion in 2006, so an average of $0.5 trillion a year would still be only a few per cent of GDP. To roughly scale down to the UK - taking GDP in 2006 as $1.9 trillion, that was about one seventh of the US GDP, while the UK population is about one sixth of the US population.
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That seems to stack up to me (to within a huge margin of error), unless anybody has a better guesstimate?

UPDATE: the author of the original piece has sent me a follow up email admitting that he may have been double counting, in which the full cost would be 'only' $10 trillion rather than $20 trillion.

6 comments:

Anonymous said...

Whatever the final figure it will be enormous. After all aren't we still paying for WW1 and WW2 (through payment of interest on unredeemed consols and War Loan)?

The way out of this (which I'm sure our politicians and the US ones will leap at) is inflation. So the rescue of the banking system might cost $20 trillion but, rest assured, $20 trillion in 2020 won't be what it is/was in 2008.

Anonymous said...

For as long as the politicos run the printing presses the money will flow, be it stuffing voters pockets with cash or/as a consequence bailing out the banking system (run by ever so clever establishment figures)

...and the way to stop it is to deal with the underlying fault line, fiat currency, which as its a social construction is political in nature not economic.

Anonymous said...

"U, the UK finally paid off the WW2 loan over two years ago! Keep up at the back!"

You've either misunderstood me or you haven't read the article you quote. The loan you're referring to is the US/UK government-to-government loan raised by another financially incompetent and incontinent Labour administration after the end of WW2 to pay for consumption rather than investment. This isn't what I was referring to. During WW1 and WW2 the UK government issued long- and undated War Loan like this one parts of which still haven't been repaid. The real value of outstanding 3.5% War Loan is substantially less than when it was issued.

Jock Coats said...

Mark, I was pondering thus the other day...

I've always preferred the idea, if it were at all possible, of taking a "big bang" approach to LVT. Going straight to the "100%" level.

But obviously people have always objected that that would wipe out the capital value of too many peoples' property overnight and that in particular those who had not yet finished paying for their home would be plunged into negative equity.

Anyway, given the size of these bail outs, I was thinking that instead of buying these doubtful debts off of the banks that created them, we could go straight to 100% LVT and compensate anyone who would materially lose out with a wad of cash so they could either reduce their existing debt to reflect teh lower capital value or alternatiively find a way to invest it to do so over time.

It seems to me that the amounts of money they are talking about in he US, and who knows shortly in the UK, this would be feasible. After all, removing the capital value of land from the system would mean a shortfall of "debt money" in the system which would need to be replaced in some form, so why not with gummint created money and accompanied by a rule preventing the banks creating yet more of their own - in other words effectively increase M0 but not permit M4 to grow as a result, and possibly even an aspiration to replace that with "pound sovereigns" as the money becomes available with future growth.

Thoughts?

Mark Wadsworth said...

U, I admit I glossed over all the other War Bonds that will probably never be redeemed. I was just trying to score an easy point with a specific WW2 loan from the USA. Which may have backfired on me.

JC, land values in a couple of year's time will be a small fraction of what they were at the 2007 peak, maybe between 10% and 25%. That is the time to introduce LVT - people can't complain about a tax wiping out their land values if The Market has just wiped out 75% or 90% of land values*.

And if LVT replaced Council Tax etc and were levied at less than 100%**, it need not have a dramatic effect on land values.

* But even then, total UK land values would still be a lot of money, £500 billion or something, which would double official gummint debts (which themselves are wildly understated, that's a different topic).

** I vastly prefer a lower rate like 5% or 10% on capital values. The tax goes up automatically if land values go up and vice versa, so revaluation is much simpler. Rental values are inherently stable (which I posted on earlier today, as it happens) so a tax on rents does not have the same dampening effect.

Anonymous said...

Surely it's an invalid calculation if you just add up all the interest for decades, given that the USA probably won't survive for decades.