How much is $14 trillion? It’s a question most of us have never had to ask before, but now we have to. Combining the costs of the bailouts of Fannie Mae and Freddie Mac (estimated at $1–3 trillion), the commercial bank portfolios (estimated at $5–10 trillion based on early descriptions of the program), and miscellaneous financial enterprises (Bear Stearns, AIG, and who knows what else, maybe it could come to $1 trillion before this is all over), and taking the high end estimates, we’re looking at a potential bailout cost of $14 trillion. So how much money is that?
This simplest way to put $14 trillion in perspective is to say that it is approximately how much the entire country of the United States produces in one year. It is a year’s income for the country.
Looking at it another way, it is approximately the total of all U.S. federal spending for the last six years.
By one measure, it is about 10 times all the money that is out there — all the money that can be spent directly. So to spend $14 trillion, we would have to spend all the money that exists in the country 10 times over.
Of course, the $14 trillion estimate is much higher than the $1 trillion estimate that the Wall Street Journal is discussing. But the estimate of $1 trillion is impossibly optimistic. It is based on the assumption that by next summer, U.S. real estate values recover by about 15 percent, approaching their peak levels of about three years ago, and that the current recession ends by the end of this year. A more likely scenario is that real estate values continue to fall and are 5 to 10 percent lower next summer than they were this summer, and that businesses, banks, and consumers remain cautious for years to come. Besides, even with the Treasury Department’s super-optimistic scenario for the economy, I don’t quite see how $1 trillion is a realistic price tag. It seems to me that policy makers are lowballing the price to get the programs through Congress. Kind of like they did with the Iraq invasion and occupation, which initially was supposed to cost around $80 billion, but the costs kept piling up, and may by now have exceeded $1 trillion. If they are doing the same kind of lowballing this time, we will be lucky to get away with a final price of only $14 trillion.
Yet I think it is obvious that the U.S. taxpayers cannot pay $14 trillion and the government cannot borrow that much either. Having the taxpayers pay $14 trillion would require all of us to pay all our personal income in taxes for the next two years or so. That would make no sense at all. Borrowing an additional $14 trillion would reduce the U.S. Treasury to junk bond status, and would add more than $1 trillion a year — your share of this would be more than $10 per day — to the interest payments the government is obliged to pay. Again, that idea is a non-starter.
The Treasury could print $14 trillion in money, but that would lead to ridiculous and painful levels of inflation. If you think people complained about paying $5 a gallon for gasoline, imagine what they would say about $300 a gallon. And the inflation would ruin most of the banks that this plan is supposed to save. Again, that doesn’t make any sense.
The U.S. government just can’t spend $14 trillion right now. It is an open question whether it can spend $1.4 trillion, a tenth of the total estimated costs of the bailouts that are on the table right now. And so it is clear that any bailout of the financial system will be a half-hearted, partial effort at best. Spending the whole $14 trillion still would not get us out of the current recession, and spending a tenth of that or less does not guarantee any results at all.
There are other problems with a partial bailout. Who decides which banks get the benefit of the bailout, and which get shut out? Will the program be used to pour money into specific regions for political reasons, or funneled as a political favor to specific companies who just walk away with it, as happened with so much of the Iraq war money?
After the Fed bailed out AIG, the Treasury had to step in to bail out the Fed. As the next step in this high-stakes game of double-or-nothing, the taxpayers will have to bail out the Treasury. But once you tap out the taxpayers, the game is over. And although it seems as if that could never happen, we are already perilously close to that outcome.