Where is Paulson going to get $700 billion for his bail-out plan from?

September 28th, 2008

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There’s news of a (yet another) tentative deal for Henry Paulson’s US$700 billion bailout Plan. There is a lot of public discontent and anger over the plan. After all, why should Main Street pay for Wall Street’s stupidity and greed? What about the millions of dollars of ‘golden parachutes’ for executives? The idea of the Plan sounds good in principle, but there are a lot of unanswered questions.

First, as Congressman Ron Paul grilled Ben Bernanke, if the free market has no idea how much these dodgy assets are worth, then how on earth can the Treasury and the Fed work out their value? Ben Bernanke gave a very unconvincing answer. As we explained in How much to pay for toxic debt?, if the government is too stingy in the price it pays (so as to act in the interests of tax-payers), then the Plan will become completely pointless. It’s an either all or never situation. Half-baked measures are worse then no measures.

This leads to another question. Even if it’s possible for the authorities to work out how much these toxic stuffs are worth in due time, where on earth did they come up with the figure of $700 billion? As this article reported,

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

In other words, that figure was just a ‘large’ number plucked from the sky.

Next, is that ‘large’ figure, $700 billion enough? We are doubtful. Total private debt in the US is a cool $41 trillion and that does not include the many trillions of dollars of public debt. Estimates of the US public debt that includes the unfunded medicare and social security liabilities ranges between $40 to $55 trillion (see How is the US going to repay its national debt?). Therefore, $700 billion is really chicken feed. Marc Faber estimated that $5 trillion is a more realistic figure.

Then, the next question to ask is this: where on earth is the money going to come from? If the US government issues new government debt, this will increase the debt-servicing burden of the US government, which in turn means that the tax burden of the American people will have to increase. But after listening to yesterday’s McCain-Obama debate, we couldn’t believe our ears when both of them were talking about tax cuts! With a national debt so astronomically high, nationalisations, bailouts and the Plan will increase it even further. How on earth could these two presidential hopefuls talk about cutting tax?

Regardless of the wrangling due to the Plan, this fundamental fact remains: the entire nation has no means to pay for its public and private debt. It’s either debt default or crushing tax for their current and future generations. If both outcomes are out of the question, then there’s only one way left. As we said before in Bush?s mortgage relief plan- who pays? back in December last year,

Bush could tax the American people to pay for his plan. But this will be politically impossible because in a democracy, the mob always want something for nothing. The next best alternative will be through stealth tax- ?printing? of money (see How to secretly rob the people with monetary inflation?). This way, the American people will pay through price inflation. That is, they will pay through the further loss of their dollar?s purchasing power.

Do you think the US will eventually resort to the monetary printing press?

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  • Actually, both the urgency and the $700b figure are for the same reason, the one that no-one is allowed to talk about: the Fed is just about broke. It had $800b of reserves, and that’s just about all gone. Treasury bond proceeds would be deposited in the Fed and get it liquid again.

    Again, everyone knows that if you want to save banks you give them more equity, which feeds into Tier 1 capital. $700b of equity would let banks support $7trillion of debt, which might just be enough. Kill the bad ones, recapitalise the good ones, standard operating procedure. But first they have to save the Fed. Without telling anyone.

    Most of what you need to know is here:
    Bailout: It’s About Capital, Not Liquidity; Seeking Beta: Interview with Robert Arvanitis

  • Actually, both the urgency and the $700b figure are for the same reason, the one that no-one is allowed to talk about: the Fed is just about broke. It had $800b of reserves, and that’s just about all gone. Treasury bond proceeds would be deposited in the Fed and get it liquid again.

    Again, everyone knows that if you want to save banks you give them more equity, which feeds into Tier 1 capital. $700b of equity would let banks support $7trillion of debt, which might just be enough. Kill the bad ones, recapitalise the good ones, standard operating procedure. But first they have to save the Fed. Without telling anyone.

    Most of what you need to know is here:
    Bailout: It’s About Capital, Not Liquidity; Seeking Beta: Interview with Robert Arvanitis

  • Hi dyork!

    Yes, the government have no choice but to monetise its debt (i.e. starting printing money).

    … the Fed is just about broke.

    One thing to clarify, for the benefit of our readers is that the Fed is broke not because it is short of money. After, it is a central bank who has the authority to ‘create’ money (Federal Reserve Notes) and credit out of thin air. Rather, it is broke because it is running out of Treasuries in its portfolio of assets.

  • Hi dyork!

    Yes, the government have no choice but to monetise its debt (i.e. starting printing money).

    … the Fed is just about broke.

    One thing to clarify, for the benefit of our readers is that the Fed is broke not because it is short of money. After, it is a central bank who has the authority to ‘create’ money (Federal Reserve Notes) and credit out of thin air. Rather, it is broke because it is running out of Treasuries in its portfolio of assets.

  • Great Gipper’s Ghost

    Raising taxes in America? I think you need to re-read the voodoo chapter in your economics text book! Supply side theory states that cutting tax rates will increase government revenue – which if you take it to it’s logical conclusion implies that we can have infinite revenue from a 0% tax rate. Now, to pass this plan through congress!

  • Great Gipper’s Ghost

    Raising taxes in America? I think you need to re-read the voodoo chapter in your economics text book! Supply side theory states that cutting tax rates will increase government revenue – which if you take it to it’s logical conclusion implies that we can have infinite revenue from a 0% tax rate. Now, to pass this plan through congress!

  • Supply side economics “advocate large reductions in marginal income and capital gains tax rates to encourage allocation of assets to investment, which would produce more supply [of goods & services]” (see Supply-side economics). This in turn is supposed to increase government revenue.

    Obviously, in view of the credit crisis, this is not working now. A lot of assets are shifted towards speculation and consumption instead of real capital investments.

  • Supply side economics “advocate large reductions in marginal income and capital gains tax rates to encourage allocation of assets to investment, which would produce more supply [of goods & services]” (see Supply-side economics). This in turn is supposed to increase government revenue.

    Obviously, in view of the credit crisis, this is not working now. A lot of assets are shifted towards speculation and consumption instead of real capital investments.