Just how much is the finance sector going to cost the US taxpayer and the US economy? Counting the cost of the financial damage in lost homes, lost jobs, lost output, lost pensions, lost investments…..is too challenging a task for this humble analyst. But lets just count the cost in terms of guarantees.
Remember the US already has ’stocks’ of debt of about $6 trillion or nearly £3 trillion pounds. In terms of its annual ‘flows’ – which include payments on those debts – it has a deficit of about $438 billion. In addition the US government has pledged to guarantee the gross liabilities of the two institutions that acted as private players in the mortgage market – Fannie Mae and Freddie Mac – which amount to about $6 trillion. The rescue of AIG and Bear Stearns and the promises that the Federal Insurance Corporation have made add in another set of guarantees worth about $3.4 trillion. In other words, the US taxpayer is backstopping about $12.4 trillion. Add to that the odd $700 billion of the latest Paulson scheme, and you start talking a lot of potatoes.
If the economy were expanding, not shrinking, if interest rates were to fall, not rise, if house prices were rising, not falling sharply, if tax revenues were to rise, not fall, if the oil price would go on falling, if the dollar remains stable, and if climate change doesn’t chuck another couple of Hurricane Ike’s at the US – then perhaps these risky guarantees may turn out not to be so risky.
But don’t count on it.