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September 29, 2008

Did Paulson Pull The $700 Billion Number Out Of His Ass?

Um, maybe.

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

In that case...Mission Accomplished!

I guess thereís two ways to look at this. The first is maybe it wonít take $700 billion worth of buyouts to unlock the credit markets. Thatís seems unlikely however. If you give the government x number of dollars to spend, they will spend every penny of it. Also, the types of instruments the Treasury is allowed to buy with this money is so wide, there will be lots of pressure from all over the country to spend the money.

The scheme "[a]llows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families."

So in addition to rewarding irresponsible lenders and borrowers, we taxpayers are now to be "protected" by buying the toxic debt of states, cities and municipalities. It's one thing to throw a life-line to the credit industry; local governments, by contrast, have the ability to cut spending drastically or raise taxes if their inhabitants want government services. Elected politicians are then accountable for runaway spending and mismanagement.

Potentially more frightening is the fact that it could also mean $700 billion isnít going to get the job done.

I know this is complex stuff and uncharted territory, so the idea that no one knows for a fact what the magic number isnít surprising but itís still pretty worrisome. I mean, if youíre spending that much money and taking on that level of liability, youíd like to have some confidence you are getting your moneyís worth, right?

And as a note, I know that this is an asset purchase and it theoretically could break even or perhaps turn a profit. Itís not as if we are just infusing $700 billion into the economy. Thatís the job of the Fed.

$700 billion here, $680 billion there and pretty soon youíre talking about real money.


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posted by DrewM. at 12:22 PM

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