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.
and 
. You can also watch it on 
The Leonhardt is a splendid article, though rc3.org has a splendid response.
If it’s such a good deal, why are the taxpayers the only buyers?
Rafe responded more directly to Ezra Klein, who also argues that the limits on compensation were a distraction.
The argument for executive compensation is that it would be one effective tool to keep banks out of the plan if they don’t need to be in it, to make it a cheaper plan, just like Leonhardt recommends. It’d be interesting to see Leonhardt’s response.
As far as I’m concerned the problem with this bailout proposal is not strictly with the economics of it, but politics, and the way the government operates. Yes, if the government buys these questionable assets they will, in fact, be getting at least some return on that. So the final expenditure will NOT ultimately be $700 billion or whatever they decide to authorize.
But government doesn’t work in that direct or simple a manner.
The fact is that, if the government is authorized to purchase up to $700 billion in questionable assets, they WILL end up SPENDING $700 billion — somehow. The $700 billion authorized expenditure amount will end up being viewed as a license to spend $700 billion. If it’s not all spent buying up toxic loans — of if it’s spent on them, but some value is recovered in the process — then it will be spent on something else. But rest assured, it WILL be spent, and US taxpayers will be out $700 billion.
Helen (#10): Because no one else has $700 billion.
This may have been mentioned before, but even the “Bargain Prices” blog had originally had only $700 (as opposed to $700 billion) as the size of the bailout in the actual blog writing. This has now been fixed.
And DJH (#12) has it right, we might not even spend all of it. I wouldn’t be surprised if the treasury wasn’t planning on spending it all, simply telling the market they were willing to.
If citizens stopped walking away from their homes it’s possible that this plan could end up being very profitable in fact only a few foreclosures are due to unaffordability but rather a general desire not to make payments anymore.
This may only end up costing $100 to $200 billion. In fact, as the article mentions, these assets will have SOME value and therefore it will be nearly impossible to “lose” the full $700 billion. I wonder what an estimated worse case scenario is. Seems like no one is trying to find the true cost. Also how much will the “oversight” cost and how much will the traders cost? Or how about the platforms or the reo managers? Someone please find a real cost so we can have a real discussion.
As taxpayers underwriting the bailout we should be treated as shareholders – and get the benefits that shareholders get. In short, the bailout has to come with at least three very heavy strings attached,
namely:
(a) payback with interest, secured by company assets and overseen by federal employees who are themselves carefully overseen;
(b) executive compensation tied to long-term performance, and any serious mismanagement punishable by revocation of options, post-retirement payments,
etc.;
(c) assignment of boardmembers by elected officials, removable by those officials, with similar strings attached to their compensation.
The Treasury is not a treasure chest the Bush administration gets to loot at will and disperse to cronies.