US Bailout Cost: When $2 Trillion Is Really $2.5+ Trillion

While I was at the gym on Sunday I noticed a graphic on one of the TVs (from one of the major cable news networks) that put the total cost of the various bailouts to date (A.I.G. (AIG), Mortgage GSEs, TARP, 1st Stimulus Package, New Stimulus Package, etc) at about $2 Trillion. This is of course is before the cost of some of the recently announced bailout plans around guaranteeing bank losses, creating a government bank to aggregate bad assets, etc.

As we all know the government is going to have to sell bonds in order to raise this money, so I decided to play around with some numbers and do a quick “finger to the wind” estimate, for this estimate let’s assume that the government is paying an interest rate of 4.5%.

If the government retires the debt from the current bailouts in five years the interest expense is roughly $500 billion, if it’s five years the cost is roughly $240 billion.

Mind you these are just rough estimates based on an imaginary scenario, in reality the government could pay back the money faster, pay it back with a higher/lower interest rate, etc. The government could also merely refinance the debt over and over again, thus increasing the interest expense several fold.

The point here is that when the estimates of a particular year’s deficit, the cost of a bailout, etc, are trotted out, it’s smarter to view them in terms of the total cost with interest, and to consider how/when the government is going to pay that debt off.

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