The right time for gov­ern­ment to step in

The Washington Times Weekly - - Commentary - Don­ald Lam­bro

The eco­nomic res­cue plan to buy up bad mortgages and other illiq­uid as­sets will push the gov­ern­ment’s debt to more than $11 tril­lion next year — mak­ing ma­jor new spending ini­tia­tives prob­lem­atic, if not im­pos­si­ble.

Economists and for­mer bud­get of­fi­cials say the true cost of Trea­sury Sec­re­tary Henry Paul­son’s un­prece­dented plan could be more than his $700 bil­lion es­ti­mate, pos­si­bly closer to $1 tril­lion when the fi­nal bills are tal­lied. And that will be in ad­di­tion to hun­dreds of bil­lion of dol­lars the gov­ern­ment has spent to grease the pri­vate buy­out of Bear Stearns and take over Fan­nie Mae, Fred­die Mac and in­sur­ance gi­ant Amer­i­can In­ter­na­tional Group.

There is no doubt that in a $14-tril­lion-a-year econ­omy, the gov­ern­ment has the re­sources to buy up the toxic se­cu­ri­ties that threaten to un­der­mine the U.S. econ­omy. And Mr. Paul­son is cor­rect in say­ing the net cost will be a lot less than the ini­tial pay­out once th­ese as­sets are even­tu­ally sold when the econ­omy has sta­bi­lized and hous­ing val­ues be­gin ris­ing again.

That’s what hap­pened in the sav­ingsand-loan de­ba­cle in the late 1980s when S&L banks failed and the feds had to shell out hun­dreds of bil­lions of dol­lars in a mas­sive bailout. In the end, the cost to tax­pay­ers was $130 bil­lion when the Res­o­lu­tion Trust Corp. liq­ui­dated bank as­sets. The gloom-and-doomers said it would take a gen­er­a­tion for the coun­try to un­due the fi­nan­cial dam­age, but it took four or five years to undo, and the econ­omy, and the bank­ing in­dus­try, emerged stronger than ever.

Nev­er­the­less, there is no doubt the buy­out costs of Mr. Paul­son’s plan will ini­tially add to the gov­ern­ment’s red ink and the rev­enue loss from a weak econ­omy will push the an­nual bud­get deficit to record lev­els.

“Who­ever walks into the Oval Of­fice in Jan­uary is go­ing to be fac­ing the largest deficit that any pres­i­dent will have faced in the his­tory of the coun­try,” said for­mer White House chief of staff Leon Panetta, who also served as Pres­i­dent Clin­ton’s bud­get di­rec­tor.

Un­der “the es­ti­mates I’ve seen as a re­sult of the eco­nomic weak­nesses we are suf­fer­ing, the bud­get deficit is eas­ily go­ing to ap­proach $700 bil­lion when the new pres­i­dent comes in,” Mr. Panetta told me.

“We are clearly go­ing to be ap­proach­ing an $11 tril­lion na­tional debt [next Jan­uary] that ob­vi­ously car­ries im­pli­ca­tions on in­ter­est pay­ments as well as the sta­bil­ity of the dol­lar be­cause that money will have to be bor­rowed, largely from abroad,” he said. Right now, the gov­ern­ment’s na­tional debt is more than $9.6 tril­lion, but that num­ber will eas­ily sur­pass $11 tril­lion next year once the bailout’s bor­row­ing costs are fully fac­tored in.

Mr. Panetta said the costs of the bailout plan will be so huge that “the new pres­i­dent will have to make a fun­da­men­tal de­ci­sion about whether he can af­ford to con­tinue to bor­row and spend, or whether he is go­ing to be will­ing to make the tough de­ci­sions to put the coun­try on the road to fis­cal re­spon­si­bil­ity.”

Barack Obama, for ex­am­ple, has made a lot of spending prom­ises to deal with ev­ery prob­lem un­der the sun — cost­ing tax­pay­ers hun­dreds of bil­lions of dol­lars more in his first term. But Mr. Panetta told me the fresh­man se­na­tor is in for a rude awak­en­ing if he wins on Nov. 4. “I don’t think there’s any ques­tion that Barack Obama is go­ing to be se­verely lim­ited [in keep­ing] the prom­ises he made in his cam­paign, and the same is true for John McCain,” he said.

That’s why the cen­tral de­bate over the ad­min­is­tra­tion’s buy­out plan, apart from whether it will work, is its up-front cost to tax­pay­ers — de­spite wide­spread agree­ment among fis­cal ex­perts that Mr. Paul­son is right when he says most of this money will be re­couped by the gov­ern­ment.

The plan’s $700 bil­lion price tag “is a gross cost, not a net cost. The net cost will be sub­stan­tially lower than that be­cause the plan would spend $700 bil­lion to pur­chase bad as­sets such as mort­gage loans, hold on to them, then sell them later back to the mar­ket,” said chief bud­get an­a­lyst Brian Riedl at the Her­itage Foun­da­tion.

Mr. Paul­son is go­ing to buy up th­ese debt in­stru­ments at, say, 50 cents on the dol­lar, maybe as low as 20 cents, then sell them in a year or two for 55 cents on the dol­lar or more, he said.

Des­mond Lach­man, econ­o­mist at the Amer­i­can En­ter­prise In­sti­tute, agrees: “They are go­ing to buy as­sets from banks at very low prices and then when the sit­u­a­tion nor­mal­izes, they are hop­ing they can sell them at least at the cost they paid. In the end, it might not cost the tax­pay­ers a lot,” he told me.

So this is a time for Congress to take a deep col­lec­tive breath and go for­ward with this plan be­cause the al­ter­na­tive of do­ing noth­ing would be much more costly to the na­tion‘s econ­omy and, ul­ti­mately, to the Amer­i­can tax­payer.

There are times when the gov­ern­ment must step in to deal with na­tional emer­gen­cies — in this case, with a plan aimed at giv­ing the econ­omy some breath­ing room to right it­self. This is one of those times.

Don­ald Lam­bro, chief po­lit­i­cal cor­re­spon­dent of The Wash­ing­ton Times, is a na­tion­ally syndicated colum­nist.

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