The Bailout And Fallout: Adding Up The Costs

The U.S. government committed trillions of dollars to fight the financial crisis — propping up ailing banks, rescuing U.S. automakers and providing credit for everything from mortgages to small-business loans. But totaling up the cost of the government's effort to rescue the U.S. economy is a bit daunting. It depends on a lot of things, including:

— how fast the economy recovers,

— how many banks pay back the Treasury's TARP money,

— how much the Fed will get for dicey mortgage-backed securities it bought from Fannie Mae and Freddie Mac, and

— whether Chrysler sinks or swims.

It's daunting. But Alan Blinder, former vice chairman of the Federal Reserve, has an educated guess: "Hundreds of billions, I would say. I have a hard time guessing what the first digit will be." Pressed, Blinder says the direct costs of the bailout will be less than $500 billion. Blinder, now a Princeton economist, says the government will most likely have losses on Fannie Mae and Freddie Mac, on AIG and on its loans to the auto industry.

The nonpartisan Congressional Budget Office generally agrees with Blinder's assessment. It hasn't made an official estimate of the cost, but in its August update the CBO predicts the Treasury's TARP program — which rescued banks, auto companies and homeowners — will lose more than $200 billion. It estimates the takeover of Fannie and Freddie could cost almost $400 billion. That would put the total cost of the bailout at about $600 billion — slightly higher than Blinder's estimate.

Understanding Taxpayer Liabilities

What about the trillions of dollars the Federal Reserve has committed to the rescue? The CBO suggests that the Fed's activities may not cost taxpayers anything. Vincent Reinhart, a former Fed official who is now at the American Enterprise Institute, agrees: "I think the direct cost to the taxpayers of the Federal Reserve's involvement in markets is not going to be very big."

That's because the Fed's activities involve lending, not spending, and the Fed requires collateral for its loans. Some of the collateral isn't worth much. The Fed, however, charges fees and interest on the trillions it has lent. The income from that is likely to offset any losses.

There's also the roughly $100 billion the Federal Deposit Insurance Corp. may have to put up to rescue failing banks. The FDIC's first line of defense is its insurance pool, which is funded by premiums from banks. That fund is running out of money, though, so taxpayers will probably have to step up — just as they did during the savings and loan crisis of 20 years ago, says Blinder.

"The taxpayer basically fronted the money and then the FDIC levied gradual assessments on banks over probably a decade and a half to pull that money back into the fund," he says. "I would guess something like that happens again." So the taxpayers may not lose money from the FDIC's activities either.

What's The Damage?

If you total it up, the bailout — the cost of rescuing the financial system — could run taxpayers around $600 billion.

But, sad to say, that's not the whole bill, says Blinder. "The bigger cost is the net loss to the economy of this recession, which is in the trillions. People should remember that."

As President Obama said Monday, there's the bailout and then there's the fallout — the cost of the longest, deepest recession since the Great Depression. The first thing to consider here is the nearly $800 billion stimulus package enacted to fight the recession. Add in an additional $200 billion to pay higher unemployment and food stamp benefits, and you're pushing $1 trillion. Put together those fallout costs and the bailout costs, and the total bill for taxpayers is likely to be more than $1.5 trillion.

But it doesn't stop there. You can't ignore the trillions of dollars of wealth that evaporated as homes and retirement accounts plummeted in value. Of course, some of that will be restored as the markets move higher and the economy starts growing again. But Mohamed El-Erian, the CEO of the big investment firm PIMCO, says don't expect a quick return to the heady days of a few years ago.

Slower Growth

"In this new world — what we call the new normal — economies will grow less rapidly," Erian says. "It's going to take us a long time to work our way out of this crisis. And therefore, the ability of the U.S. economy to create jobs is going to be less than it has been in the past."

Among those hurt most will be young people, he says, adding: "And I think of that every day when I look at my daughter in terms of what her generation is going to inherit because of this crisis"

In addition to a tougher time finding jobs, Erian says, the next generation is likely to face rising taxes or higher inflation if the country chooses to simply add the cost of this crisis to the national debt. He says Americans will also pay a price for the world's loss of confidence in American markets. Those costs could haunt the United States for years to come.

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