How Big is This Bailout?

So far we have the $700 billion bank bailout, another $700 billion "stimulus package" proposed by President Elect Obama, and the $800 billion fund Treasury Secretary Henry Paulson has at his discretion, trying to jolt consumers into buying again.

These come on top of the $200 billion to keep Fannie Mae and Freddie Mac alive, the $140 billion (so far) lifeline for AIG, the $34 billion sustenance needed to save the big three auto makers, the $29 billion bailout of Bear Stearns, and the $20 billion for Citigroup. You throw a few tens of billions around, pretty soon it comes to real money. And we are just getting started, without even considering the present $455 billion federal budget deficit.

Although much of this overlaps, and some will be recouped, this is a spending program of epic proportions. How does this stack up historically? Adjusted to inflation, the Marshall plan cost just $115 billion in today's money. The New Deal cost a puny $500 billion in today's money, and the Vietnam War an estimated $700 billion. The postwar record deficit was 6% of GDP (in the early 1980's), and we are already on pace to almost double that!

George Will is quoted saying Alexander Hamilton started the Treasury Department with nothing, and since then it is the closest we ever came to breaking even.

And guess who will pay for all this? Those of us who saved rather than borrow, and prudently lived within their means. This is diametrically opposed to the way capitalism is supposed to work, where those who fail are weeded out, to be replaced by more competent people. What we're doing now is taking assets from the competent and prudent people and handing them to the inept bunglers. This is a great way to make our entire economy feebler and more vulnerable.

In addition, printing money to smooth out the business cycle is a sure recipe to devaluing the dollar. One has to wonder why would the Chinese lend us their money so we can get our economy going again. Surely they understand what is happening and are worried about the declining value of the dollars we will be using to pay off our debts to them?

I am also troubled by the notion that the Obama economic team learned the wrong lesson from the Great Depression. They think FDR was not assertive enough and should have done more to alleviate it. This sort of deficit spending as an attempt to thwart a recession was tried in Japan in the 1990's and failed miserably. The Japanese lost an entire decade trying to spend their way out of the hole. It won't work here either, because we don't have a liquidity problem as we had in the 1930's. We have a confidence problem that stems from fears of insolvency. The Bush administration's erratic and desultory attempts at policy are creating so much uncertainty that added liquidity is meaningless. Throwing more liquidity won't help when there is so much uncertainty about the basic rules of the economy going forward.

It is not the government's job to make stocks go up. It is their job to ensure stability and confidence to counter the fear and panic now so prevalent all over the world. Markets will find their own equilibrium when that happens. We should not burden future generations with mammoth debt and saddle the economy with an intrusive new partner in Washington DC.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm.

Comments

[glitz]

As reported by the GAO the management and accountability of the 700 Billion "bailout" by this Administration, appears to be just another example of shrinkwrapping piles of cash, loading on palets, and dropping from helicopters into Baghdad!!!

[research]

Japan federal spending worked great!

It was the same 1937 FDR mistake of trying to slow spending to reduce the deficit that prolonged Japans pain.

http://fabiusmaximus.wordpress.com/2008/11/25/casualty/

It's not deficit spending that's the problem, it's wasting that money on the gamblers instead of the real economy:

The Unregulated Weapons of Mass economic destruction are:

Credit default Swaps, derivatives and shorts.

It's Off track Betting.

Paulson and Bush are

Paying off the bookies and the Marks.

So nothing gets better.

A trillion Dollars in actual orders of solar and wind will completely revitalize the economy and 100B to 500B$ of electricity per year! 2-10 year ROI of 100-500% over the life of the investment.

the GOP is still wrong.

FDR WAS RIGHT!

"A credit default swap (CDS) is a credit derivative contract between two counter parties....

differences between CDS and insurance; the

buyer of a CDS does not need to own the underlying security;

in fact the buyer does not even have to suffer a loss from the default event"

Think about that.

It's off track betting on the market.

IT HAS NOTHING TO DO WITH THE REAL ECONOMY.

Even as we bail them out these companies are shorting each other!

[dadw5boys]

THIS IS NO BAILOUT IT IS A BANK HIEST !!!!!!!!

IF THEY GO FOR FORT KNOX BEND OVER AND KISS IT ALL GOOD BYE !!!!!!!!!