Surpluses And Deficits Since 1980

Here is an interesting graphic from the WSJ depicting the surpluses (a spurious notion to be sure) and deficits incurred by our government since 1980:

Graphic courtesy of the WSJ

The graphic comes from an article from the WSJ that suggests that the aggregate cost of the Government’s bailouts and interventions will be less than the estimated number of around $1.4 trillion :

From the WSJ:

…there are a few reasons why the government’s interventions probably won’t be quite as expensive as people think. For starters, some experts say it’s far from certain that the U.S. government will even need all the money it has budgeted. They say policy makers set their spending limits on the high side to make clear to investors that the government would do whatever it takes to make financial markets work again. And once the government’s rescue program begins to establish prices for currently unmarketable securities, the hope is that the market will start functioning again before the U.S. actually has to buy $700 billion worth of them.

Regardless of how much the government actually spends, the impact on the budget deficit will be further limited because budget rules allow the government to treat such debt as a “means of financing.” Only the anticipated losses on the investments, plus interest costs, would show up as additions to the deficit.

Ultimately, as Mr. Bernanke suggested, the government stands to get a lot of its money back on the securities it buys. It can sell them off or hold them as investments, depending on market conditions.

Just how much the government can recover is unclear. The Fed chairman told lawmakers he expects it to be a “substantial amount,” and he compared the process to an art auction. “Just as when you sell a painting at Sotheby’s, nobody knows what it’s worth until the auction is over,” Mr. Bernanke said.

The problem here is that we’re talking about investing in the worse assets the banking industry has to offer and/or shoring up poorly run companies like the Mortgage GSEs, not to mention the fact that it’s not a given that we’ve already seen the worse of the crisis. In other words it’s quite possible that there are hundreds of billions worth of hidden costs, and/or that things won’t work out as well as Paulson and Bernanke have predicted.

After all these are the some individuals who were trying to assure that things were contained last year.

Finally I could care less about the current “budget rules”, as a concerned citizen the fact that the government is taking on new debt to spent amounts that are a multiple of this year’s projected deficit makes me more than a little nervous.

You can read more here.

Sources:

The WSJ: “Cutting Back the Rescue’s $700 Billion Price Tag” — John D. McKinnon, September 24, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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