Opinion: The Fed bailout has too many 000,000,000,000s to comprehend
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
So far, Washington has pledged $8.5 trillion to the bailout of the financial sector.
Now, we’re hearing about the Big Three automakers asking for $34 billion, seemingly on the platform of ‘you’re giving out free money? Cool!’
But let’s hold it a second. Seriously, $8.5 trillion sounds like a lot of money, right? That’s, like, trillions of dollars. With a T. As in 1,000 billions times 8.5.
How often do you, in your daily life, deal with trillions of anything? Not counting the popcorn and candy prices at movie theaters.
Keep thinking. we’ll wait.
‘When you talk about trillions of dollars, people’s brains just shut off,’ said Barry Ritholtz, writer for the Big Picture, a top-ranked financial blog.
‘They don’t know what you’re talking about. In fact, when you talk about hundreds of billions of dollars, people just can’t grasp how much money that is.’
The economic numbers and fears played a major role in deciding the presidential campaign. And they’re going to dominate the early months, perhaps years, of the Obama administration.
For his upcoming book, ‘Bailout Nation,’ Ritholtz has tried to put the amount in more easily understood terms. He compared the costs of other historically significant government programs with the current bailout.
James Bianco, president of Arbor Research and Trading Inc., crunched the inflation numbers for nine key government expenditures.
So, we can compare which costs more: the bank bailout, the invasion of Iraq, the Vietnam War, the Louisiana Purchase or ...
... the moon landing, among others.
The current bailout, as it turns out, costs more than all of them.
Marshall Plan: cost: $12.7 billion; inflation adjusted cost: $115.3 billionLouisiana Purchase: cost: $15 million; inflation adjusted cost: $217 billionRace to the moon: cost: $36.4 billion; inflation adjusted cost: $237 billionS&L crisis: cost: $153 billion; inflation adjusted cost: $256 billionKorean War: cost: $54 billion; inflation Adjusted Cost: $454 billionThe New Deal: cost: $32 billion (est.); inflation adjusted cost: $500 billion (est.)Invasion of Iraq: cost: $551 billion; inflation adjusted cost: $597 billionVietnam War: cost: $111 billion; inflation adjusted cost: $698 billionNASA’s lifetime budget: cost: $416.7 billion; inflation adjusted cost: $851.2 billion Total: $3.92 trillion
Uh oh. Now, is it time to panic?
Maybe not. Although Washington has guaranteed $8.5 trillion to the various banks, the actual figure will probably total nowhere near that amount.
Part of the deal ensures the government a stock in these companies, so as long as they can turn their dire situation around, some of that capital will come back when the stocks are sold. Could even be a profit.
In order for the banks to produce a return, ‘they don’t have to be doing great,’ said David Shulman, senior economist at UCLA Anderson Forecast. ‘They just have to be doing better and making money. Then the government gets paid off, and earns interest on the investment.’
When Ritholtz released his comparative numbers recently, many readers criticized the way he calculated inflation -- however, Shulman sides with Ritholtz’s and Bianco’s math -- and the insinuation that we won’t see any money back from the bailout.
‘He’s making an assumption that all the money is going down a rathole,’ Shulman said. ‘My guess is the government will do a lot better than zero ... [and potentially] make a little bit of money on it.’
As it did, actually, on the Chrysler bailout years ago.
Although Ritholtz admits that taxpayers likely won’t be paying out the full $8.5 trillion -- he estimates it’ll end up costing between $1 trillion and $2 trillion -- he doesn’t buy into the idea that the government will come out better than before the bailout.
‘I don’t think we’re going to make money back on it,’ Ritholtz said. ‘I think that’s kind of a nonsensical thing that the politicians say.’
Regardless, the inflation data seems to be the simplest way to quantify the bailout in more comprehensible terms. And then you might begin to realize how far-reaching this bailout is to the U.S. economy.
‘On a comparative basis, the amount of money that we have at risk as a nation to resolve this situation is just enormous compared to all these other historic spending sprees,’ Ritholtz said.
-- Mark Milian