Here Are Some Answers to the Public’s Questions About the Financial Crisis
By DAVID STOUT
Published: October 3, 2008
http://www.nytimes.com/2008/10/04/business/economy/04questions.html?scp=16&sq=Who%20will%20watch%20the%20bailout?&st=cseWASHINGTON — With the markets bobbing up and down daily, millions of Americans have been queasy about their personal finances and, to judge from readers’ comments as well as opinion surveys, wondering whether the ship of state is still seaworthy.
(snip)
Q. Even if the government gets some of the money back in the course of a rescue plan, it sounds as if America can say farewell to the really good times, doesn’t it?
A. Beware of predictions like that. Remember that a decade or so ago, with the country awash in prosperity and the Soviet Union and the cold war having passed into history, there was some serious debate about what the government should do with the enormous budget surpluses projected for the first decade of the new century.
A terrorist attack, a recession and a couple of wars later, that debate seems as ancient as arguments over whether Americans would ever buy Japanese cars. There is no perfect telescope to peer into the future.
Q. If taxpayers finance this recovery plan, will Social Security and Medicare be affected?
A. There will be no effect on Social Security and Medicare, which are paid for through deductions from paychecks and contributions from employers. Yes, Social Security and Medicare face some problems that will have to be addressed sooner or later, but to avoid a headache, you should think of those issues apart from the current financial crisis. And tune out oversimplified, alarmist language.
Q. But if the government spends hundreds of billions of dollars on a rescue plan, won’t there be a mountain of debt that will take years to pay off?
A. There’s already a mountain. As for the current crisis, optimists have suggested that after the Treasury buys up those troubled mortgage-backed securities and resells them, it could actually wind up ahead.
Previous “financial interventions,” as the Congressional Research Service of the Library of Congress calls them, have turned a profit. When the government helped Chrysler with $1.5 billion in loan guarantees in 1980, it made a profit of $311 million from the sale of warrants, or options to buy stock. On the other hand, the 1989 bailout of the savings and loan industry cost the Treasury $150 billion, according to the research service.
The value of the mortgage-backed securities in the current crisis will not really be known until they are unraveled. As the research service says, surely without fear of contradiction, determining the cost of government intervention “is not straightforward.”
Q. Despite all the talk about Wall Street greed and regulators who don’t regulate, aren’t the American people partly to blame for the current mess, considering that a lot of them took on debt they couldn’t pay back?
A. Political oratory notwithstanding, there is no simple answer to this one. Most Americans still make their mortgage payments each month. And one person’s greed is another person’s aspiration. Yes, some people took on debt they ultimately could not handle, and there were some shady lenders and real estate speculators, but no two situations are alike.
Being a homeowner is a big part of the American dream, and has long been encouraged by the government. Consider the mortgage-interest deduction, for instance. Q. Suppose the Treasury can’t sell all those mortgage-backed securities for anything close to what it paid for them. Couldn’t that put the government deeper in the hole, and shouldn’t that worry people?
A. We’re back to that “mountain of debt.”
The rescue plan calls for raising the national debt ceiling by $700 billion, to $11.3 trillion. But, again, it has never been clear that the full $700 billion will be spent. In fact, the Congressional Budget Office has estimated that the final cost could be “substantially less.”
And all this talk about billions and trillions demands a little perspective. As of mid-August, the total outstanding debt of the United States government was just a bit more than $9.6 trillion, according to the budget office. But not quite $4.2 trillion of that is debt held by government trust fund accounts, the largest being those for Social Security and also including accounts for retirement benefits destined for military people and civil service employees. Economists, who supposedly understand this stuff, like to focus more on the publicly held debt that the United States owes to domestic and foreign lenders. That number, now just above $5.4 trillion, is about 38 percent of the country’s gross domestic product for 2008. Compare that to the historical high of 1946, when World War II had pushed the overall debt to 109 percent. Moreover, a lot of the debt is owed to Americans whose portfolios include Treasury securities.
Q. But shouldn’t the people be worried that a huge bill will come due one day?
A. Again, some perspective is called for. Consider this passage from an article in The Times: “When President Bush informed the nation last Sunday night that remaining in Iraq next year will cost another $87 billion, many of those who will actually pay that bill were unable to watch. They had already been put to bed by their parents.”
That was written five years and several hundred billion dollars ago and is truer than ever. Also the United States still has a good credit history. Perfect, in fact. It has never defaulted.
Printer-friendly format
Email this thread to a friend
Bookmark this thread
(1000+ posts)
Send PM |
Profile |
Ignore
