Posted by
Andrews on Tuesday, September 30, 2008 2:23:45 PM
An interesting aspect of the debate about the bailout is the figure of $700 billion. Yes, that is the price tag attached to the bailout bill, but everyone is also treating the number as the true measure of the bad loans out there. First of all, even if that were the total of dubious loans, the fact is not all such loans are in default or valueless. So, the number is probably high even if we assume the best. But there is one other problem. the bill was laden with immense amounts of Washington pork, making the figure incredibly inflated.
All of which means, if we do nothing, the economy will not lose $700 billion in assets, it will probably lose a substantially smaller amount. In addition, faced with worthless assets, I bet many of the lenders will find some portion of those supposed $700 billion in loans will start performing to some degree or another. What is a worthless loan when asking for government bailout often turns into a performing loan when it is the responsibility of the lender to collect.
Nor is this a horrible crisis even if the number of $700 billion is correct. Recall that the IRS collects two or more times that every year in taxes. Admittedly, $700 billion in losses would slow the economy, but it would hardly be a crippling blow. Nor, as I have pointed out, is the amount lost likely to be anywhere close to the estimates. As the lenders likely padded their losses when presenting them to the government, and the government padded them when preparing the legislation, the losses are likely much smaller. And, while even $200 billion is a serious loss, it is nowhere near the death knell some are calling it.
So, before we follow
Rich Lowry into demanding a bailout lest we face the next great depression, we should ask ourselves if the numbers really add up.
POSTSCRIPT
By the way, for the benefit of my few European readers, an American billion is what the British call "a thousand million". Our "trillion" is the British "billion". So the estimated price tag is $700,000,000,000 and not $700,000,000,000,000 as those familiar with the British convention would imagine.