The Credit Crisis Has The US Taxpayer On The Hook For $9.7 Trillion

As the government has bailed out various companies, guaranteed debt, bought commercial paper, etc, in response to the credit crisis, one of the big questions has been: “how much is all of this going to cost the taxpayer?” Well we now have a very disturbing answer: “$9.7 Trillion”.

From Bloomberg:

Feb. 9 (Bloomberg) - The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged up to $5.7 trillion more. The Senate is to vote this week on an economic-stimulus measure of at least $780 billion. It would need to be reconciled with an $819 billion plan the House approved last month.

Only the stimulus bill to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. The remaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients’ names have not been disclosed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan , a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?

Financial Rescue

The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps.

Federal Reserve lending to banks peaked at a record $2.3 trillion in December, dropping to $1.83 trillion by last week. The Fed balance sheet is still more than double the $880 billion it was in the week before Sept. 17 when it agreed to accept lower-quality collateral….

…The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

Now the first thing to keep in mind is that we’re actually at risk for an amount that’s far greater than $9.7 trillion, because it’s all borrowed money and you have to add interest expense to the total. Furthermore the cost of servicing the debt (even if we’re only on the hook for say 25-50%) will impact us in other ways, whether it’s budget cuts, higher taxes, etc, etc.

Granted, it’s quite possible that a lot of this money will be paid back, and that not all of these commitments will have to be met, etc. However the fact that the taxpayer is potentially on the hook for approximately 2/3rds of GDP is no small matter, especially when $8 trillion of the total wasn’t even voted on by elected officials.

While I agree with the need for certain Federal Agencies to be largely politically antonymous, there needs to be some degree of checks and balances for amounts/actions of this magnitude.

If you think about it $9.7 trillion is the potential cost of the vile mixture of de-regulation of certain areas, regulators who were asleep at the wheel in others, and Wall St. thinking it had invented the free lunch in the form of mortgage CDOs and other derivatives. As I said earlier while it’s possible that tighter regulations may stifle growth to some degree, the cost of a cycle of booms, busts and crises like the one we have now are undoubtedly far greater.

You can read the article in full here.

Source:

Bloomberg: “U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs” — Mark Pittman and Bob Ivry, February 9, 2009.

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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