The “sweetened” version of the financial rescue plan (remember, don’t call it a “Wall St. bailout”), considered by most to be (as a Washington Post story puts it) “the greatest intervention of the federal government into the private marketplace since the Great Depression,” passed the House and was signed by President Bush yesterday. And yet the Dow fell more than 150 points on Friday, to end its worst week (biggest point drop) in seven years.
Why? Well, Friday morning’s news of more than 150,000 jobs lost in September (and the ninth straight drop) had a lot to do with it. It’s kind of a stark reminder that this is a rather desperate “rescue”–more like being put on life support than going on muscle-boosting steroids. We know that even after this rescue is put in place, our economy will still be badly over-extended and under-invested.
The stories tend to refer to the new legislation as the “$700 billion package,” but that doesn’t count the $107 billion increase in the deficit from extended tax cuts (including AMT relief) whose costs of temporary extension are not offset although the policies are far from emergency, temporary ones. (Here is Concord’s position on it.)
Here’s how the official Congressional Budget Office cost estimate describes the effect of the rescue portion on the debt and deficits (”net budget impact”) (emphasis added):
CBO expects that the Treasury would use most or all of the $700 billion in purchase authority within two years (after which the authority to enter into agreements to purchase various troubled assets would expire). To finance those purchases, the Treasury would have to sell debt to the public. Federal debt held by the public would therefore rise by about $700 billion, although the government would also acquire valuable financial assets in the process.
As noted above, CBO expects that since the acquired assets would have some value, the net budget impact would be substantially less than $700 billion; similarly, net cash disbursements under the program would also be substantially less than $700 billion over time because, ultimately, the government would sell the acquired assets and thus generate income that would offset much of the initial expenditures.
In addition to any net gain or loss on the purchase of $700 billion or more in assets, the government also would incur administrative costs for the proposed program. Those costs would depend on the kinds of assets purchased or insured. On the basis of the costs incurred by private investment firms that acquire, manage, and sell similar assets, CBO expects that the administrative costs of operating the program could amount to a few billion dollars per year, as long as the government held all or most of the purchased assets.
Note that the Blue Dog Democrats did go along with this version (here’s the roll call), despite their opposition to the (Senate-added) deficit-financed sweeteners. I think they knew that the risk to the economy, if this legislation had not passed, vastly outweighed the potential benefits in holding out on AMT relief–which the Blue Dogs knew would ultimately be passed in violation of pay-go anyway (despite all their valiant efforts).
You see, the Blue Dogs know how to be adults in representing the best interests of their constituents through their (thoughtful) votes.