[DEBATE] : The Hidden Costs of the Bailout
Riaz K Tayob
riaz.tayob at gmail.com
Mon Sep 29 04:33:48 BST 2008
The Hidden Costs of the Bailout
Isn't 100% annual interest usurious?
How The $700 Billion Bailout Could Cost $700 Billion Every Year
In their rush to show voters they are proactively doing something to
solve the financial crisis crushing Wall Street, the House, the Senate,
and the Bush Administration have put together a bailout -- one which not
only may actually worsen the situation, but whose true costs could
stagger the American Economy. And these costs could rise to an annual
total equal to the bailout itself. Hence, Americans would be paying an
effective interest rate of 100% on the original cost of the bailout?
Not only are the politicians overspending and wasting taxpayer dollars,
they are creating conditions which are highly likely to severely worsen
every American's financial position. And, on top of this, they not only
are intentionally are hiding the potential costs which could destroy the
U.S. Economy -- all for the sake of a photo opportunity prior to the
General Election -- but are giving taxpayer dollars to entities who are
likely to invest them outside of the U.S.
Specifically, the $700 billion bailout is likely to initially hit
taxpayers with $200 to $400 billion in losses after the Federal
Government tries to sell the bad assets it purchased at prices far above
the market value of what they will pay.
Does Anyone Really Believe Wall Street Is Looking Out For America's Best
The claims by Wall Street leaders and politicians that taxpayers will
make money on the toxic assets being purchased are disingenuous. If
purchasing these assets were such a great bargain today, investors would
be snapping them up instead of heading for the hills. So, unless you
believe Washington politicians are financially more astute than the
traders on Wall Street, it's easy to see who is getting conned and who
is doing the conning.
Mistake #1 is not buying assets at market value and, instead, paying an
artificially high value to those who need the money the least. These
sharp investors will put the funds where they can find the greatest
return -- and that likely will be investments overseas, not in the
Mistake #2 is borrowing the $700 million plus the prior funds already
used for a bailout total of more than $1 trillion (this is a more
accurate estimate of the initial cost of the bailout). This means adding
$1 trillion to our already high $10 trillion National Debt -- a debt
level almost everyone agrees already is excessive. There are a number of
costs associated with these actions which are not being discussed.
Increasing Our Debt By $1 Trillion Will Increase Interest Rates
First, the additional borrowing will increase interest rates across the
board, especially given the relative lack of desire on the part of
investors when it comes to U.S. Government borrowing. Some of our
largest creditors are looking for ways to get rid of dollars -- not
accumulate more. If this impact on interest rates ultimately is as high
as just two percentage points, the costs are enormous. And it could be
far more than just two points given the fact interest rates are at
superficially low today.
Second, we will have to pay interest on the $1 trillion bailout. At 5%
annually, that is an extra $50 billion in taxpayer dollars which does
nothing constructive. All it does is drain the U.S. Treasury -- with
many of those dollars going out of the country. At 10% annually, the
amount rises to $100 billion -- just to carry the debt and not even pay
it back. That's $100 billion wasted every year possibly for decades.
Third, and more importantly, the additional borrowing likely will
increase the average rate of interest paid on the entire national debt
as well as on U.S. consumer and corporate debt. Shifting the focus from
the new $1 trillion in debt to the entire $11 trillion National Debt
potentially increases that segment of the cost tenfold.
Small Interest Rate Increases Mean Big Dollars
Again, even if this increase is only two points (2%) -- which may be an
overly conservative assumption -- it means adding $100 billion a year in
interest payments for the $10 trillion National Debt (this nets out
additional interest Americans would receive from higher interest rates
because foreigners own about half the National Debt). U.S. consumer debt
totals over $2½ trillion so just a two-point rise could mean an extra
$50 billion Americans would have to pay directly out of their pockets
each year -- and get nothing in return. And given the lack of
restrictions on consumer interest rate increases, this number could
easily reach $100 billion annually.
If home mortgage rates increase by an average of just two points, that
could add even more to the total. American home mortgage debt totals $11
trillion but much of that is not subject to changing rates which do
affect new mortgages and adjustable rate mortgages. The likely impact of
a two-point interest rate increase could be on the order of $100 billion
annually and could increase over time to $200 billion annually as new
mortgages replace old ones.
An interest rate increase also would impact commercial and other
business-related debt which currently totals approximately $29 trillion.
Much of this debt is very sensitive to short-term interest rate changes
so a two-point change easily could result in a $350 billion increase in
business and financial sector interest obligations. This increase also
would have to be passed on to consumers and other business customers.
Don't Forget The Penalty Americans Will Pay For A Depressed Dollar
Even worse, spending $1 trillion we do not have also will put further
downward pressure on the dollar. If that pressure results in just a 5%
decline in the value of the dollar, Americans' standard of living will
fall as goods made outside the country become more expensive.
Such a change would mean U.S. consumers could pay an extra $100 billion
annually on the $2 trillion they purchase from other countries -- with
no net gain in actual goods and services purchased. Hence, we would pay
an extra $100 billion for the same products we are purchasing today.
Given potential fluctuations in currency rates, this number could easily
double or triple in a period of time measured in months, not years.
Washington's Cure Could Kill The Patient
So, before the bailout is done, the politicians should realize their
efforts to save the American Economy may only serve to make it far
worse. While we may "feel good" when we experience the rush of $700
billion being injected into the Economy (and even then, we're putting
those funds into the wrong hands -- they should go to consumers who will
spend the money right here in America and help pump prime the Economy
rather than to sophisticated investors who will send the money out of
the country), in just a matter of months -- not years -- we may find the
decision was a terrible mistake.
As the preceding analysis demonstrates, it is possible the bailout
ultimately will cost Americans the equivalent of an interest rate of
100% -- i.e., annually adding the same amount ($700 billion or more)
every year to our total financial obligations. At that point, the
bailout -- instead of saving us -- could put us in a financial death spiral.
Aaron Harber hosts "The Aaron Harber Show," seen Tuesdays at 8:00 pm and
Wednesdays at 5:00 pm on KBDI-TV Channel 12 (Colorado Public
Television). He previously was certified by the Securities & Exchange
Commission as an Investment Advisor. Please go to www.HarberTV.com for
more information. Send e-mail to Aaron at HarberTV.com. (C) Copyright 2008
by Aaron Harber and USA Talk Network, Inc. All rights reserved.
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