Is Soaring Debt The Lesser Of Two Evils?

Some Economists Say Any Ill Effects Stemming From Massive Bailout Better Than The Alternative

(CBS/AP)  The economy could suffer a massive hangover from the government's efforts to rescue the financial system in the form of a soaring debt burden. But the alternatives look infinitely worse.

The $700 billion the administration is seeking from Congress as the upper bounds of what it will need to take a mountain of bad loans off the books of financial firms is certainly an eye-popping figure.

To get the funds to buy up the bad mortgage loans that have threatened to bring the financial system to its knees, the government will have to borrow. And that borrowing will come at a time when the federal budget deficit is already soaring.

The deficit for this budget year, which ends on Sept. 30, is expected to rise to $407 billion, a figure that is more than double the $161.5 billion imbalance for 2007, reflecting what the economic slowdown and this year's $168 billion economic stimulus program are already doing to the government's books.

The Bush administration is estimating that the deficit for the budget year that begins Oct. 1, which will cover the new president's first year in office, will hit $482 billion, a record in dollar terms.

And that forecast doesn't include the $200 billion the administration committed to spending two weeks ago when it took over the nation's two biggest mortgage companies, Fannie Mae and Freddie Mac.

And it doesn't have any of the $700 billion the administration is seeking to soak up the bad mortgage-backed securities that have been at the heart of the severe credit crisis the country has been struggling with since August 2007.

The legislation Congress passed this summer that gave the authority to rescue Fannie and Freddie boosted the limit on the national debt by $800 billion to $10.6 trillion.

The legislation the administration is now seeking to authorize the financial system bailout, according to a draft obtained by The Associated Press, would boost that debt limit to $11.3 trillion, up another $700 billion.

It is the rapidly rising debt that is cause for concern. The government is already spending more than $400 billion a year just to pay interest on the national debt. The higher that debt goes, the higher the government's borrowing costs and the less it has to spend on other programs.

Republican John McCain and Democrat Barack Obama are both running for president, making campaign promises about what new programs they will implement once in office, promises that could be severely constrained by the costs of a financial bailout.

The escalating borrowing also means that the government is competing with the private sector for loans, driving up interest rates. And then there is the matter of the country's large trade imbalances which mean the United States has to borrow $2 billion a day from foreigners.

Will foreigners still want to lend as much to the United States if there are concerns that all the borrowing could weaken the dollar's value against other currencies.

But even with all these threats, economists said the government has to take decisive action because the alternative of letting the financial system slide into even deeper problems which could jeopardize the routine loans that businesses and consumers need was simply not an option.

"It was critical to arrest the downward slide in financial markets," said Sung Won Sohn, an economist at California State University, Channel Islands.

The dire situation was dramatically demonstrated this past week when the Federal Reserve, working with the central banks of other nations, poured billions of dollars into the financial system without any significant impact because of the fear keeping banks from lending.

The financial system has already been staggered with $500 billion in losses from the mortgage mess and the International Monetary Fund has estimated the ultimate price could be $1 trillion.

What the administration's plan would do is at least establish a price for the mortgage-backed securities, which at the moment no one wants to own.

Officials who have briefed Congress on Treasury Secretary Henry Paulson's plan have suggested that one approach would be for the government to buy the toxic debt through a reverse auction process in which companies wanting to unload their mortgage-backed securities would propose a price to the government - say 50 cents on the dollar - and those offering the lowest price would win the bid.

By establishing a price for assets no one currently wants to buy, it could allow a market to develop and allow financial firms to get on with the effort of taking their losses and getting the damaged assets off their books.

"This could go a long way toward solving these problems," said Mark Zandi, chief economist at Moody's Economy.com, who has written a book on the mortgage meltdown.

And the final cost to the government?

No one knows for sure.

"The federal government is going to have loans that aren't repaid," Peter Morici, an economist at the University of Maryland, told CBS News. "That's the American public, and in turn it will take possession of the houses and have to resell them."

Morici estimates Americans might end up permanently responsible for half the debt - up to $300 billion, reports CBS News correspondent Kimberly Dozier.

But Zandi said if the experience with cleaning up all the assets left over from the savings and loan mess is any guide, it should be less than the $700 billion that the administration is seeking.

In the S&L crisis, the government was able to recoup about two-thirds of its initial costs when it sold the assets it had obtained from the failed S&Ls.

"Obviously there is a big upfront cost to taxpayers," Zandi said, "but the ultimate cost may be measurably lower."

[riddelup]

Why are we talking politics this measure will put a financial yoke around the necks of all Americans. With the exception of the big business capitalist who caused this in the first place. Never vote again for anyone who votes for this bailout.

[sjc_1]

"Just once, I''''d like someone to try paying down the debt..."

Clinton ran a surplus and was paying down the debt when it was about half of what it is now only 8 years later. As soon as he ran a surplus the Republicans were all talking about how they could do tax cuts for the rich and destroy the surplus. I guess the Republicans are just the "borrow and waste" party.

[missingamerica]

Did you check out this part of the Fed/Administration bailout plan?

[bq]
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
[eq]

Paulson is trying to get himself a license to steal so he can go down in history as "$007".

[mytoosense]

Remember the last seven years when Bush basically said:
"Regardless of the outsourcing of hundreds of thousands of high paying manufacturing jobs, regardless of the overall shrinking of middle class incomes, regardless of the illegal aliens swarming over our boarder and sucking our social safety nets dry, regardless of the huge price hikes in essential goods like food, energy, education, housing and health care, regardless of a exploding national dept that is driving the value of our dollar to an all time low,

Non of this really matters, The Economy Is Doing Well"

[kenammons]

just say no to another big time ripoff of the people of this country. there is little hope congress will do the right thing and block george the evil one and his thugs from costing the decent god fearing people of this country another trillion dollars

[negrovote-]

To everyone who is failing to pay their mortagage.....

You are destroying the American economy, and my pocket book.

F*ck you. I hope you sleep under the bridge.

[negrovote-]

Kick those dead beats out of their homes and put them up for sale.

I aint paying for it.

Those lazy *** dont deserve it while I am forced to rent AND bail them out too.

[ubrew12]

''Is Soaring Debt The Lesser Of Two Evils?''

I think if you are under 30 its actually the worse of the two evils.

[babooph]

Lemay gloated he had bombs enough to put the enemy "back in the stone age"-wish he was seer enough to see that paying for those bombs may put the US middle class there.

[babooph]

The propaganda system lauded the CEO bunch as "great businessmen"getting their deserved" share!! Turns out they backed Bush with a lot of the fraud $ they cooked the books for -NOW IT IS THE MIDDLE CLASS TAXPAYER WHO PAID THE CRIMINALS-THEY WILL NEVER BE PROSECUTED-so nice to have a lobbyist to pay with your stolen funds! ALL LEGAL!!!!

[txgrouch2006]

The Federal charge must host complete control in this matter, else the states will create their own agenda when the money runs dry.
Posted by mcv57 at 05:35 PM : Sep 21, 2008

That sounds EXACTLY how the Roman Empire fell and broke up into the coutries that became Europe.

[mcv57]

Posted by txgrouch2006

Congress must charge the coup d''''etat (with the support of the people) until political turmoil is calm; thereby, a succession may proceed.

[mcv57]

Posted by txgrouch2006

Given recent events to State abuse to power (State governors ignore the Bushwacker on international affairs), and police record for corruption, record has shown that individual states will take matters into their own hands - host national guard to host state power and corruption.

The Federal charge must host complete control in this matter, else the states will create their own agenda when the money runs dry.

[txgrouch2006]

- Eliminate Law Enforcement Agencies/ and call the
Military to maintain martial law.
Posted by mcv57 at 05:18 PM : Sep 21, 2008

Wow, EXACTLY what they want us to do. Panic and demand martial law.

WHO is the dictator poised to step into power after we finished the CITIZEN ASSISTED coup d''etat?

[mcv57]

What the U.S. Government will not tell you is that the "alternative" is inevitable. Instead of placing a band-aid over a massive dismemberment, the government should prepare for a complete restructure plan after the dust settles:

- Sell affordable gold and silver coinage to the public (to maintain a barter currency for those who were responsible enough to save U.S. promissory notes).
- Allow Real Estate Industry to belly-up (an economic illusion of appreciation created by greedy banks).
- Sieze the White House, SEC, U.S. Supreme Court for treason.
- Eliminate Law Enforcement Agencies/ and call the
Military to maintain martial law.
- Allow the corporate giants to crumble.
- Throw all the CEOs, with cooked books, in jail
(to set an example of this corruption and national subversion of the U.S. Constitution).

IN THAT ORDER ... otherwise, the Rich Powerful Politicians will consume all the gold and create Socialist/ Communist government.

[txgrouch2006]

Back when this country first elected Bush, I knew we were in trouble if we didn''''t get rid of him quickly. Then, we elected him again, flat out in the face of his colossal economic obliviousness.
Posted by elicatlover at 12:39 PM : Sep 21, 2008

Do you REALLY think John "Mumbles" Kerry would have done ANY BETTER? Remember his famous Wall Street Journal interview where he AGREED with outsourcing jobs?????

If the Democrats had fielded a GOOD alternative, I would have voted for him (NOT anyone named Clinton). But it seemed they saw the handwriting on the wall, and they THREW THE ELECTION by running Kerry.

I''m a staunch Republican voting for Obama. But I''m not stupid.

[lindh4]

Perhaps the Chinese Commucapitalists could be persuaded to buy the deeds to all the default housing and we could learn to sing the Internationale`
in Cantonese.

[Netterz]

Had the greed filled banking/financial industry not loaned money hand over fist to illegal immigrants, to amounts that are in the TRILLIONS, that they had absolutely NO SECURITY ON AT ALL, would have solved half of this problem. The homes that they were living in, as well as the vehicles they were given loans for as well, cost more than any house or car I could have ever afforded, even being a union worker. The 2nd problem, is that they handed out loans to Americans on well hidden adjustable rate mortgages, with the blatent LIE, that the payment increase would be minimal, and ripped off the home owners by increasing the payments to an out of reach amount, that no one could pay. Some of my friends had payments TRIPLE with no warning, in 3 months time. All while one CEO of a bank, was severed, due to his shady practices, with a $60 BILLION severance package. The Gov''t should have stepped in LONG before it did, to take care of the American people, and STOP the shady ARM''s, and forced the banks to allow those people to return to the payment they could afford.

[seedobecome]

Evil has no face unless or until identified by the innocent victim except the children of the future. Sadly, they have no choice.

[broncfan1661]

This is the biggest assault on the taxpayer in history. It is rewarding failure and sounds so much like the run up to the Irag invasion ie; Making it sound so dire that congress must act immediately.
How could the so called experts be so blind as not to see this coming and why all of a sudden do we have such urgency to have legislation passed in one week.
Also by putting Paulson in charge is like putting the fox in charge of the henhouse. To me, this smells real bad!