Stuff Happens: The Mortgage Bailout and the Federal Budget

If there's anyone out there who still thinks "deficits don't matter," the federal takeover of Fannie Mae and Freddie Mac should puncture that complacent little bubble.

The breathtaking financial mismanagement of the mortgage giants means the U.S. government has very little choice other than stepping in. But Fannie Mae and Freddie aren't the only ones who have been playing fast and loose with the financial facts of life. The government's mismanagement of its own budget means it is in a very bad position to take this on. Saving the mortgage giants is just going to make the government's long-term financial situation much worse.

We don't quarrel with the need for a bailout. If anything is "too big to fail," Fannie Mae and Freddie Mac qualify. The repercussions would spread through not just the U.S. economy but the global markets as well. It would hard to find an economist - or a homeowner - who doesn't think the hemorrhaging in the mortgage market has to be stopped. With luck, economists say the government bailout could lower mortgage rates, although it may not shore up housing prices or stem foreclosures.

But the taxpayers are going to pay for the privilege. A couple of months ago, the Congressional Budget Office estimated a mortgage bailout would cost $25 billion over 2009-10. But this weekend government officials have been signaling that the cost could be much higher than that - and Congress has authorized up to $200 billion for the job. To put that in perspective, $25 billion is slightly less than the federal government spent on agriculture in 2006, and more than it spent on science and technology, including the space program. By contrast, $200 billion is considerably more than we spend on Iraq per year (the Congressional Budget Office estimates we spend $11 billion a month on the war).

Most economists would say the mortgage bailout is money well spent. The stock market seems to like the idea, and both John McCain and Barack Obama have come on board supporting it. Basically, the country seems to have no choice.

The problem is that the government is already running a deficit of nearly half a trillion dollars ($482 billion), on top of a $9.5 trillion national debt. Every time the U.S. runs a deficit and comes up short in its year-to-year budget, it has to borrow the money to make up the difference, increasing the national debt. And unfortunately, running deficits is now virtually routine. The U.S. government has gone into the red for 31 out of the last 35 years. We run deficits in good times and bad. We run deficits to give tax cuts in times of war. We run deficits because the American public thinks it can have its cake and eat it too. We run deficits because too many of our elected officials have decided to live for today; the nation's future is someone else's problem.

So the need to take over Fannie Mae and Freddie Mac just underscores the hazards of deficits as a way of life. Stuff happens. Rather than facing a $200 billion deficit to do something really important, the U.S. is now heading toward a whopping $10 trillion dollar debt. The interest on a debt that size is costing us more than the war in Iraq. Plus we have huge expenses coming up covering the Social Security and Medicare expenses for the baby boom.

So the U.S. government is not all that different than your average spendthrift. if you live beyond your means, if you rely on borrowing to meet your monthly bills, you don't have anything to fall back on in an emergency. And you're not putting a dime aware to cover your old age.

And both emergencies and old age are going to come up. The U.S. government is facing $53 trillion in liabilities to cover Medicare and Social Security for the baby boomers. And more emergencies will happen, whether they're natural disasters, military threats, or more bailouts to cover up for economic recklessness that threatens us all. Right now, the U.S. government can stave off the consequences of reckless lending. But if we don't get our fiscal house in order, who's going to save the government from itself?

Comments

[bugdog]

"So the U.S. government is not all that different than your average spendthrift. if you live beyond your means, if you rely on borrowing to meet your monthly bills, you don't have anything to fall back on in an emergency. And you're not putting a dime aware to cover your old age."

I find the best system is to borrow like a spendthrift and sock away cash made in the black market...

[Aaror]

Is the US just too big?
Seriously, I mean, we started out with less than a fifth of our current size, and just kept growing. Maybe there is a maximum size for a democracy before it gets too big to be accountable to it's citizens. If there is such a limit, I suspect it is around 50 million (California is a bit too big to be a democracy). Perhaps we need to dust off the articles of Confederation (what our founding fathers used before they decided on the United States), and come up with a weaker, looser federal government? I don't know. If I were a regular commentator I would put this as a question to the readers, but I am not, so all I can do is hope this thread grows.

[jmpurser]

"To put that in perspective, $25 billion is slightly less than the federal government spent on agriculture in 2006, and more than it spent on science and technology, including the space program."

Okay, that floored me. I had been thinking "Who cares about a 'mere' 25 Billion when we're 10 TRILLION in debt 'on the books' with untold more trillions 'off the books'?" But to realize that we're going to blow AT LEAST more than our nation spends on science and technology INCLUDING THE FREAKIN' SPACE PROGRAM just astounds me.

[mosh]

Stuff happens alright, and in the case of the financial industry lobbyists are paid obscenely big bucks to make sure it does.

Stuff happens to the little folks, not the big pigs feeding at the corporate( = government) trough at taxpayer expense.

And John McCain. When I think of good ol'John I don't POW I think the Keating 5 and phil gramm but I have a longer, meaner memory than some.

[Huffingtonposter231]

The democratic congress said they would end our financial problems that they if elected they would be "fiscally responsible".

Are you saying that hasn't happened? Sure doesn't look like it does it!

So what are we to do when neither party offers us responsible government but promises us it every single election?

[joebaggadonuts]

Revolt.

[mosh]

Vote ron paul?

[jmpurser]

First, I don't recall the "democratic congress" promising anything like ending our financial problems. Second, the "fiscal responsibility" of congress has little to do with the failing of Freddie and Sally.

[dz555]

"We run deficits because the American public thinks it can have its cake and eat it too." Nonsense! The American public, in general, is no longer capable of thought. We have descended into a cattle like existence, chewing cud at the feet of the media show business frenzy, and the corporate and political and religious theocracy. Those in power will plunder all the wealth they can while they can. When it all comes crashing down they will simply point at sky and say it was God's will and "Jesus is coming". I mean come on now can't you see this is all part of God's divine plan? At the rate we are going I expect to see multiple listings for bridges in Brooklyn on Ebay long before Jesus shows up.