10/30/2008 05:12 am ET Updated May 25, 2011

Good Money After Bad

I was watching one of the senators discuss the bailout package this morning on TV (which one is irrelevant since all those in favor sound the same). This august figure sat there explaining how the public is going to make money on the purchase of distressed assets from struggling financial institutions. For example, Asset A is offered for 40 cents on the dollar. The government buys it, holds it for a few years and sells it for 60 cents on the dollar. Voila. Big Fat profits. The only thing I did not hear this modern day Webster acknowledge (and based on the events of the last few years, I can't believe he was unaware) is that asset prices, in fact, can go down. Hey, just ask millions of Americans who can only sell homes they bought for far less than the purchase price. Or how about people who bought equity in many of our financial institutions in the last year. Important safety tip, stock prices can drop.

However, our Congressional delegation, in the breadth of its' wisdom and rush to bailout, has not actually counted all the beans. First of all, if you issue $700 Billion in bonds, there is interest that must be paid. In order to profit, the sale price actually has to exceed the total cost of carry. (In my experience, most elected delegates don't consider the cost of carry to be their problem, so they ignore it).

In this case, however, there is one more cost our national financiers are not considering. In issuing this boatload of new debt, it in all likelihood will raise the cost of all the other debt we are now carrying (either demand for new funds, or cost of refinancing outstanding debt). With over $10 trillion or so of outstanding, an increase in average cost of one percent (over the what would otherwise be the ambient level of rates) would, over ten years, increase the net cost of borrowing by over $1 trillion. This does not include the slew of net borrowing yet to come.

So next time a Senator or Representative offers you a piece of financial advice, respectfully tell him you are not shopping for bridges today.