Kate Foster – “$1,000,000,000,000: The astonishing cost of US government’s desperate bid to rid the economy of toxic debt”


$1,000,000,000,000: The astonishing cost of US government’s desperate bid to rid the economy of toxic debt

Kate Foster | September 21, 2008

THE UNITED States government is preparing to spend $700bn (£382bn) buying up “bad” mortgages as part of a massive financial bail-out to tackle the credit crisis.
The US Treasury is proposing the fund to buy back a large proportion of the bad debt in the US mortgage market. Business insiders fear the total cost of the bail-out could rise to as much as $1 trillion (£545bn) or $1,000,000,000,000.

President George Bush hailed the move as “unprecedented action” in the face of “unprecedented challenges” to prevent the US economy from grinding to a halt as problems sparked by the credit crisis spread through the entire financial system, leaving jobs, pensions and companies under threat.

The move is part of the largest financial bail-out since the Great Depression and the sum involved is equivalent to almost one third of the British economy. Bush yesterday insisted the cost to taxpayers from shoring up markets was better than the alternative of job losses and blighted pensions.

He admitted the measures required the US “to put a significant amount of taxpayer dollars on the line”. But he added: “I’m convinced that this bold approach will cost American families far less than the alternative. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions.

“We’re going to work with Congress to get a bill done quickly. I found a common understanding of how severe the problem is and how it’s necessary to get something done quickly and I think we will.”

The bail-out follows the collapse of investment giant Lehman Brothers last week which had incurred huge bad debts related mainly to the US mortgage market. Its rival Merrill Lynch was bought out by Bank of America, and the US government has bailed out insurer AIG and mortgage giants Fannie Mae and Freddie Mac.

Officials from Congress and the Treasury will meet to work on the plan. The deal is expected to be signed into law within the next few days. The plan would give the government broad powers to buy the bad debt of any US financial institutions for the next two years. It also would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion – making room for the massive rescue.

The aim of the bail-out is understood to be a way of bringing all the bad debts into one organisation whose task will be to hold them on behalf of the taxpayer until they can be sold off at some point in the future. The draft of the proposal does not specify what the government would get in return from financial companies for the federal help.

There are some members of Congress who are unhappy at the thought of the taxpayer taking on hundreds of billions of dollars of currently worthless debt. But the leader of the Democrats in the House of Representatives, Steney Hoyer, said he expected quick action.

Treasury Secretary Henry Paulson said a “bold” move was needed to restore the financial system’s health and that the package needed to be “large enough to have maximum impact”. He added: “This troubled asset relief programme must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible.

“The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.”

The US government is also stepping up action to increase the availability of capital for new home loans. Its next task will be to overhaul bank regulations. The chairman of the Senate Banking Committee, Christopher Dodd, said: “We understand the gravity of the moment.”

On Friday, the US government announced plans to guarantee money market funds – mutual funds that typically invest in low-risk credit such as government bonds – up to a value of $50bn.

Published in: on September 21, 2008 at 7:20 PM  Comments (2)  

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2 CommentsLeave a comment

  1. WOW !

  2. Scary, eh?


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