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 rescue effort is daunting.
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The Bailout And Fallout: Adding Up The Costs

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The Bailout And Fallout: Adding Up The Costs

The Bailout And Fallout: Adding Up The Costs

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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.


And I'm Robert Siegel.

Federal Reserve Chairman Ben Bernanke said it again today, the recession is very likely over. But the costs remain from the worst economic crisis or collapse since the Great Depression. The U.S. government committed trillions propping up banks, rescuing U.S. automakers, and providing credit for everything from mortgages to small business loans.

We've been looking back at the financial crisis one year ago and we asked NPR's John Ydstie to take on the big question: what's it all going to cost?

JOHN YDSTIE: 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: how fast the economy recovers, how many banks pay back the Treasury's TARP money, how much the Fed will get for the dicey mortgage-backed securities it bought from Fannie Mae and Freddie Mac.

It's daunting, but Princeton economist Alan Blinder, former vice chairman of the Federal Reserve, has this educated guess.

Professor ALAN BLINDER (Economics, Princeton University; Former Vice Chairman, Federal Reserve): Hundreds of billions, I would say. I have a hard time guessing what the first digit...

(Soundbite of laughter)

Prof. BLINDER: that is going to be.

YDSTIE: Mm-hmm. More likely above or below five, do you think?

Prof. BLINDER: I think more likely below.

YDSTIE: So, less than 500 billion. And what's going to swallow the biggest billions?

Prof. BLINDER: I think a couple of places where big losses are going to come is the auto bailout. AIG, which is already in for like $180 billion, it's hard to imagine getting that money back; Fannie and Freddie.

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

Now, you might be thinking: well, what about the trillions the Federal Reserve has committed to the rescue? Well, the CBO suggest that the Fed's activities may not cost taxpayers anything.

Vincent Reinhart, a former Fed official who's now at the American Enterprise Institute, agrees.

Mr. VINCENT REINHART (Resident Scholar, American Enterprise Institute; Former Director, Federal Reserve Board's Division of Monetary Affairs): I think the direct cost to the taxpayers of the Federal Reserve's involvement in the market is not going to be very big.

YDSTIE: 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, but the Fed is charging fees and interests on the trillions it's lent; that income is likely to offset any losses.

But what about the $100 billion the FDIC may have to put up to rescue failing banks? Well, the FDIC's first line of defense is its insurance pool funded by premiums from the banks. But that's running out of money, so taxpayers will likely have to step up, just as they did during the S&L crisis 20 years ago, says Alan Blinder.

Prof. BLINDER: The taxpayer basically fronted the money and then the FDIC levied gradual assessments on banks over probably around a decade and a half to pull that money back in to the funds. I would guess something like that happens again.

YDSTIE: The CBO makes a similar assessment, so the taxpayers may not lose money from the FDIC's activities either. 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.

Again, Alan Blinder.

Prof. BLINDER: The bigger cost, the net loss to the economy of this recession, which is in the trillions. People should remember that.

YDSTIE: As President Obama said yesterday, 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 another 200 billion to pay higher unemployment and food stamp benefits, and you're pushing a trillion dollars. Put together those fallout costs and the bailout costs, and the total bill for taxpayers is likely to be more than $1.5 trillion.

Now, I wish I could stop here, but 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 moves 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.

Dr. MOHAMMED El-ERIAN (CEO, PIMCO): In this new world, what we call the new normal, economies will grow less rapidly. It's going to take a long time to work ourselves 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.

YDSTIE: And among those hurt most will be young people, says El-Erian.

Dr. EL-ERIAN: 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.

YDSTIE: In addition to a tougher time finding jobs, the next generation will likely face rising taxes or higher inflation if the country chooses to simply add the cost of this crisis to the national debt.

El-Erian 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.

John Ydstie, NPR News, Washington.

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