How big is the bailout (aka “world’s greatest heist”)?

Before we go to the main event, please ponder this quote of the day from The King Report (subscription only):

Paul Volcker’s chief purpose {in the Obama Administration} is to give the appearance that he will persuade Obama to remove the excess credit at the appropriate time. … Resurrecting Volcker during the most wanton monetary policy in US history in order to inveigle global investors into believing that Volcker will convince Obama and US solons to halt their debauchery at the precise time is like Caligula enlisting Saul of Tarsus to advise him on the precise time to go celibate.

With that in mind, how big is the “bailout” — the flood of acronyms and money attempting to solve this financial crisis?  The New York Times shows the totals:  “Tracking the bailout: the government’s commitments” (26 November 2008), and the grand sum.

That gives just dry numbers.  Barry Ritholtz shows us what this really means in “Big Bailouts, Bigger Bucks“, posted at his website The Big Picture, 25 November 2008:

Whenever I discussed the current bailout situation with people, I find they have a hard time comprehending the actual numbers involved. That became a problem while doing the research for the Bailout Nation book. I needed some way to put this into proper historical perspective.

If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion dollars. People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.

Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:

  • Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
  • Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
  • Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
  • S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
  • Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
  • The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
  • Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
  • Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
  • NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion (data courtesy of Bianco Research)

That is $686 billion less than the cost of the credit crisis thus far.

The only single American event in history that even comes close to matching the cost of the credit crisis is World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion

The $4.6165 trillion dollars committed so far is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States: $3.6 trillion, adjusted for inflation (original cost was $288 billion).

Go figure: WWII was a relative bargain.

I estimate that by the time we get through 2010, the final bill may scale up to as much as $10 trillion dollars…

This is somewhat misleading (as is my title; a tradition at the FM site).  The bailout was not an expenditure of dollars, like all of the above (except for the Louisiana Purchase).  Most of the bailout expenditures were purchases of financial assets.  Many of these probably will be repaid; many of these earn interest (some at a higher rate than the government borrowed the funds). 

But these purchases have damaged the US government’s solvency, and generated benefits for our plutocrats far greater than anything gained by the taxpayers or the nation.

Let us hope that we get more from the next few trillion that will be spent in 2009 — and the trillions more probably necessary to spend in 2010 and 2011.

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Situation Reports aboutthe crisis on the FM site;

  1. The US economy at Defcon 2, 11 March 2008 — Where are we in the downcycle?  What might the world look like when it ends?
  2. The most important story in this week’s newspapers, 22 May 2008 — How solvent is the US government?
  3. Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
  4. High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
  5. A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
  6. A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
  7. Status report on the financial crisis: we’re at a critical point in time, 10 October 2008 

8 thoughts on “How big is the bailout (aka “world’s greatest heist”)?

  1. A trillion here and a trillion there and pretty soon you’re talking about real money.

    I think the bailout program, taken as a whole, must qualify as the most in-effective,to say the least, government program in history. And it’s all being done on the fly without a comprehensive plan in place. Are there any sources which track how much money is available for the US to borrow in the world?

  2. One good thing has come of this crisis: the exposure of the shibboleth of unregulated free market capitalism as a dangerous heresy. On the other hand, almost as a doppelganger called up automatically to counter any good this exposure might do, the free market ideologues now characterize the bailout as a move toward “government control”, or “socialism.”

    The bad things that have resulted from this crisis are almost too great to number, the worst being perhaps the realization that government itself is powerless to act, even to think, without the guidance of the very financial sector it is supposed to regulate.

  3. “A trillion here and a trillion there and pretty soon you’re talking about real money.”

    Or soon you’re talking about play money. This can only go so far until dire consequences hit. To pay for this, either the United States Treasury will print money out of thin air with nothing to back it up, in which case the United States Dollar will end up being next to worthless due to hyperinflation. Or we will borrow money from the Chinese we can never pay back, in which case the Chinese will end up owning us. I wonder if Nancy Pelosi and Harry Reid have thought of this. If they have, I wonder if they care. After all, at their ages, they will probably be dead by the time this comes back to bite the younger folks. So it won’t affect them. Short-sightedness and mortgaging the distant future for short-term gain. Can you say “Western Roman Empire”?

  4. senor tomas: “The Treasury will print money out of thin air . . .or we will borrow money from the Chinese we can never pay back, in which case the Chinese will end up owning us. . .”

    I think borrowing money from the Chinese and printing money we don’t have is the same thing. When the Fed prints money, it issues bonds which the Treasury then has to sell. sell. The bonds are really nothing more than promises to repay based on future revenues of the issuing agency. Your state and municipal governments, and corporations, do this all the time. The national debt, the sum of all the bonds we’ve issued over the years, is a special case, though, since apparently no one expects it ever to be paid off — only the interest on it has to be paid. The interest is generally a reasonable deal for those with vast sums of money that has to be placed somewhere.

    Your point though is valid when interest on the national debt begins to be great enough that investors doubt whether we can even pay it. I dont know if we’re there yet or not.

  5. I have a question about printing money. When people say the government will print money to make up for what we can’t borrow is that a literal statement? Will there be actual cold, hard cash being printed off or will the government use some other scheme to increase the money supply? I ask because I know most money in circulation today only exists in digital form.
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    Fabius Maximus replies: Yes, they can create money. Cash — printed paper — is only one form of money. The holders of the trillions of dollars in outstanding treasury bills received credits to their checking accounts when they mature — but few ask for cash.

    The Wikipedia entry for Monetary Policy provides a clear explanation.

  6. I was under the impression that 2 trillion of the 4.x trillion so far was printed money that the central bank loaned at very nice rates to other banks in order for them to remain solvent.
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    Fabius Maximus replies: I will repeat what this post explained.

    The New York Times article I cited explained this clearly — although their totals were before last week’s new programs (billions and billions of new committments).

    So far the government has spent almost $1.4 trillion … That figure does not include the $755 billion in currency swaps with central banks in other countries, nor does it include some lending programs for financial institutions whose cost is not quantified.

    I described the nature of the “expenditures” is as follows:

    Most of the bailout expenditures were purchases of financial assets. Many of these probably will be repaid; many of these earn interest (some at a higher rate than the government borrowed the funds).

    “that the central bank loaned at very nice rates to other banks”

    They were not at “very nice rates” in any meaningful or usual sense. First, they were at below-market rates — some at far below market rates. Second, we do not know how many of these finanical assets will eventually return their principal. A overall loss of 5% — easy to imagine — probably will wipe out the entire “very nice rate” earned.

    The history of government lending does not encourage optimism. Some turn out fine (the depression’s Home Owners’ Loan Corp, the 1979 loan guarantees to Chrysler) — but there is a long list of very expensive failures.

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