The $700 billion “Paulson plan” (or “Hanky Panky”) is big.
In fact, $700 billion is such a startlingly large number that a surprisingly large amount of commentary has gotten it completely wrong.
For instance, click here to see the results of a Google News search on “$700 million” and “bailout.” It seems that plenty of journalists got the million/billion distinction wrong. (Plenty of bloggers, too.)
Interestingly, not all of these articles are mistaken — several were noting that Treasury Secretary Paulson is “reportedly worth about $700 million.”
How big is this million versus billion mistake? As Jon Stewart reminds us, $700 billion is equal to around 2,000 McDonald’s apple pies per American, meaning that the million versus billion mistake amounts to 1,998 apple pies difference.
But there’s a deeper economic issue here. The Paulson plan does not “cost” the taxpayers $700 billion dollars. The plan is to give Paulson a $700-billion war chest to purchase securities that have some value.
Now it might be that we are buying truly valuable securities at bargain prices, in which case we all make apple pies; or it might be that we are buying junk, and the true cost will be several-hundred apple pies each.
David Leonhardt’s splendid column in today’s New York Times does a great job in outlining these issues.
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Wow, how about that 700 trillion bailout…
I don’t think most people have really get a sense of the number when dealing with large numbers such as you’ll typically see in government. How many people think ending pork barrel spending would solve our budget problems? Besides John McCain I mean. I think people would tend to be more outraged at hearing about a 600 million loss, and less outraged at a 30 billion loss. And 2 trillion is chump change.
BTW, I think you mean 2000 apple pies for each person in the US. Unless those apple pies cost 350 million each…
Jon Stewart was commenting on a “news” story that “explained” the amount of money involved as being the equivalent of 2000 McDonald’s Apple Pies for each American citizen.
He didn’t make the original comparison.
As for the “actual” cost, if there is no transparency, no oversight, no accountability, – as Paulson wants it- it may as well just cost $700 billion right now. We’ll never know.
and I thought this problem was caused not by defaulted Mortgages, but by the Credit Default Swaps that were woefully underfunded? Yeah, the defaults triggered them, but the CDS is what made this into a huge sh**storm.
Are we buying up those CDS?
If so, they are underfunded from what I understand by a factor of like….30:1
How do we get our money back on that again?
That’s a replenishable 700 billion war chest. The legislation allows him to hold 700 billion at any one time. So, after buying 700 billion and selling it for X, he can then go and buy 700 billion more.
Yes, these securities have “some value.” However their “value” bears no relation to the prices willing sellers and willing buyers are willing to agree on right now.
The Big Bailout is an attempt to narrow the “bid to ask” range to a point where sellers and buyers begin to agree on market-clearing prices again. The resumption of a market for this sludge is key – please keep this in mind. If Washington was simply going to transfer cash to banks and keep these securities on the government books, I think we can all agree that 1) it will take a lot more than $700B to “fix” institutional capital ratios across the country and 2) the time horizon for the return on investment probably exceeds politically reasonable expectations. So this $700B is just to prime the pump and keep the market trading.
My problem is that everyone treats this as a cash purchase, which it is not. We do not have $700B to throw around. Capital must be raised from foreign and domestic buyers of U.S. Treasury obligations which must be paid back with interest. Uncle Sam will borrow money via a 10-year T-note and buy collateralized 30-year mortgages which it will try to sell next week. I seem to remember seeing this strategy being tried before.
I would begrudgingly support buy-and-hold strategy for these instruments, with the caveat that as part of the “holding,” the securities were unwound and the individual debts serviced (or sold for servicing).
According to my calculations, the bailout is so big that it could cover the state of Delaware in $1 bills and still buy us all a year’s supply of McDonald’s apple pies.
There are around 400 billionaires in the USA, with a worth greater than a trillion dollars. Have them all pony up the money to get to the 700 billion, and let them keep about 1/2 billion each for themselves so they don’t starve.
As I wrote recently, The Trillion-dollar bailout and why it will be profitable for taxpayers – I believe that over the next 3 to 5 years, taxpayers will be handsomely rewarded for saving the financial system. My guess is – all in – the taxpayers will have gained $100 to $200 billion from this bailout; which is clearly against the conventional wisdom prevailing in the media. But a bet against the short to medium-term viability of the US economy is a sucker’s bet. See the full analysis : http://www.savingtoinvest.com/2008/09/trillion-dollar-bailout-and-why-it-will.html
Under the “and another thing!” category:
The “self-correcting mechanism” of equity stakes in the firms that participate is another sham. A few credit default swaps in the right place at the right time could rob the U.S. Treasury of its equity *after* it pays (borrowed) money to shore up the balance sheets. Unless were going to make a no-CDS rule for those firms, like the short sale ban. Pretty soon the “market” for that company’s equity isn’t really a market anymore.