Wednesday, September 17, 2008

Treasury Sells More Debt: The Consequence Of Bailouts

100 dollar billsAll the news is awash this morning talking about the AIG bailout while an equally important story is seemingly being overlooked. Reuters published a story this morning called, “Treasury Selling debt to help Fed.”

“Treasury said it is selling $40 billion of cash management bills -- essentially a fresh batch of debt -- on Wednesday at the U.S. central bank's request as part of what a Treasury official called an attempt to ‘help them better manage their balance sheet,’" according to the article.

Unfortunately, it seems that people are forgetting that someone has to pay for these bailouts. This $85 billion to rescue AIG has to come from somewhere, and it appears that it will come in the form of more debt for the U.S. government. Combine this with Freddie and Fannie, and we are looking at a lot of new debt, in addition to the already swelling deficit. “Between the $29 billion the Fed pledged to swing the Bear Stearns sale to JPMorgan in March, $100 billion apiece to rescue mortgage finance firms Fannie Mae and Freddie Mac, up to $300 billion for the Federal Housing Authority, Tuesday's $85 billion loan to insurer AIG and various other rescue deals and loans, taxpayers are potentially on the hook for more than $900 billion,” according to Reuters. I don’t know who in their right mind would want to lend money to the U.S. right now, but thankfully there are people and governments out there doing just that. How much longer they will be willing to do so remains to be seen, but each new bailout and each new economic problem has to be getting us closer to that time when no one will lend to us.

Each time the government bails out a company, they say it’s the last one. It happened with Bear Sterns, then with Freddie and Fannie, and now with AIG. Somehow I don’t think this will be the end of it, and hopefully you aren’t buying it either. “’We're essentially continuing a system where profits are privatized and...losses socialized,’ Nouriel Roubini, a professor at New York University's Stern School of Business said, adding that auto makers, airlines and other struggling businesses would no doubt be asking for government help too,” according to Reuters.

“But Michael Feroli, an economist with JPMorgan in New York said the Fed could have chosen to let AIG fail, just as it had done with Lehman. ‘We don't know if the disease would have been worse than the medicine,’ he said. ‘We'll never know. But we know we lived through Lehman,’” according to Reuters. We lived through Lehman, and we would live through AIG. It would hurt, but we would live. Once we got through the short term turmoil we would also be in a much better position for the long term. Sometimes you have to make decisions that are going to be tough in the short term for the sake of the future; someday I hope our politicians realize this.

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