Friday, October 3, 2008

Why they chose '$700 billion' for the bailout

How the feds chose $700 billion as the amount they'd ask for to bail out the US economy has been bugging some people--especially after officials were quoted as saying, "It's not based on any particular data point," and "It sounded like a really large number." Which makes it sound like they are idiots pulling numbers out of their asses.

But I have another explanation as to why they choose that amount: because they wanted to charge into battle with overwhelming force.

If you're going to stop the greatest financial panic we've seen in our lifetimes, you don't do it by being coy. It's critical that you show up with an amount of cash that not only IS large enough to do the job, but SEEMS large enough to do the job--and then some. 

So you pick the largest plausible number you can think of -- you want the reaction from the market, "Wow, $700 billion! That's a HECK of a lot of money! That will SURELY be enough to do the job!"

You don't want them thinking you're nickle-and-diming at a critical time like this. You want to come in with an amount so stupendous that it shuts everybody up. And, you hope, makes the panic back off. That's why they chose that number--not based on a close analysis of how much they'd actually need and not a nickel more.

Whether it IS enough, you can only guesstimate; the outstanding mortgage market is something like $1.5 trillion, the current guessed-at value is something like $1.2 trillion, most of which is not at risk; so $700 billion certainly SOUNDS to economists like MORE than enough to do the job of buying up all at-risk mortgages.

It's such a large number that, I'm guessing the officials are hoping, THEY WON'T ACTUALLY SPEND that much in the long run, so they can proudly announce, in a year or so, that they "only" spent $400 billion, or $300 billion, or whatever. They'll look like heroes -- they galloped up with an overwhelming amount of money to save the day, and then came in under budget. Heroes!

Whether it will actually work that way, of course, nobody knows, mainly because when you throw that amount into a highly politicized shark tank, all kinds of things can go wrong, by which I mean every politically connected business (read: every one with a lobbyist in DC) will try to get a chunk of that money, preferably by selling the Feds assets, whether troubled or not, at a premium price. The Feds, I think, just hope that if they can just get the panic to stop, the financial system can reboot, and after that, everything else is merely a matter of waste and corruption -- which we can deal with better with an economy that's back at work. 

And who knows, they might be right. I've heard lots of alternatives that would likely have worked and not cost so much and not enriched so many jerks (and I'll try to post some), but who listens to us libertarians?


No comments: