Maybe I'm Simpleminded

In my simple way of looking at the economic crisis, it is easy for me to get lost in all of the machinations the government is undertaking to stop the bleeding. I do not have a degree in economics and so my simple way of looking at things keeps me from comprehending the true enormity of the crisis, and the cosmic complexity of the bailouts. But when the NY Times proclaims that the current total of all bailouts either already in place, or soon to be in place, is equal to half of the total annual Gross Domestic Product (GDP) of the United States, I get a very visceral sense of the desperation that Paulson, Bernanke, et al must be feeling.

The NY Times yesterday gave a tally of all of the bailout monies that Paulson, Bernanke, and pals have pledged to solve our economic woes. Here is a brief breakdown:

• October 3: $700 billion allocated for the TARP program
• October 14: FDIC pledged $1.4 trillion to guarantee bank-to-bank loans
• October 27: The Federal Reserve started a program to buy as much as $2.4 trillion in corporate commercial paper (short-term notes)
• $29 billion to engineer the takeover of Bear Stearns
• $122.8 billion to bailout AIG
• $306 billion of government guarantees for Citigroup's troubled mortgages and toxic assets
• November 25: The Fed commits up to $800 billion to unfreeze credit for home buyers, consumers and small businesses

The magnitude of the government's largess begs the fundamental question: Where is all this money going to come from?

As you can see from the list above, the $700 billion TARP program -- the program that the public identifies with the bailout -- is really only a small piece of the complete bailout. From Bloomberg:

Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

"Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved," said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. "The other areas are quite a bit larger.”

The situation is so precarious that a noted economist, Nouriel Roubini, wrote an article entitled, Can Central Banks Go Broke? The tenor of the article makes it clear that Mr. Roubini feels that there is a very real possibility that our government has bitten off more than it can chew.

All of this, to my simple way of thinking, makes me very nervous. The $7.76 trillion of taxpayer money currently at risk, according to Bloomberg, "is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages."

Recall that Henry Paulson's original plan was a bold request to make himself the most powerful man in America. He wanted to be given $700 billion to do with as he saw fit, with no government oversight or accountability. He basically said, "Trust me. I know what needs to be done." Fortunately that proposal didn't sit well with congress and they modified it so that we weren't saddled with the curse of "King Henry."

Congress was right to reign in his desire of the autocratic rule of the U.S. financial services because only a few weeks later Paulson did a 180-degree reversal. Somehow, a few weeks later Paulson had determined that his original plan to buy toxic assets was not a good idea. Hmmmmm. Why doesn't this surprise me? The flailing and floundering of the the government's financial wizards engenders very little confidence that they actually have a plan.

Here we sit, in the midst of the worst financial crisis since the great depression, house prices are falling, people are losing their jobs, retail sales are in the pits, and, according to Bloomberg, "the worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies."

Worst of all, the people in charge of fixing the problem are just winging it! This seems crazy!

But, maybe I'm just simpleminded.

Was there ever such an autumn? And yet there was never such a panic and hard times in the commercial world. The merchants and banks are suspending and failing all the country over, but not the sandbanks, solid and warm, and streaked with bloody blackberry vines. You may run upon them as much as you please--even as the crickets do, and find their account in it. They are the stockholders in these banks, and I hear them creaking their content. -- Henry David Thoreau in his journal, October 14, 1857