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Rising costs of financial turmoil

The multibillion-dollar cost of government bailouts is just the start.

By Staff writer of The Christian Science Monitor / July 24, 2008

Richard Drew


Accountants for Congress this week put a $25 billion price tag on the federal rescue of two companies that anchor US mortgage markets, but that's just the tip of a potential iceberg of taxpayer costs for America's banking mess.

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The reality is that taxpayers could end up paying nothing at all for rescuing the financial system – or the cost could end up as much as 10 times that $25 billion guesstimate.

Even if the official public costs are small – the White House dropped its objections to a House bill that includes $15 billion in housing tax breaks – the financial crisis is already taking a bite out of the pocketbooks of ordinary Americans in a number of ways. Just one prominent example: The economy is growing more slowly than it otherwise would, affecting jobs, incomes, and government tax revenue.

On a more encouraging note, some of the very large numbers that have surfaced in the news do not represent taxpayer obligations. The national debt won't jump by $5 trillion due to a rescue of Fannie Mae and Freddie Mac. Some $300 billion in loan guarantees designed to prevent foreclosures, also in the House bill, won't put taxpayers on the hook for that amount.

"I don't know that it's necessarily going to cost us anything" officially, says Peter Morici, a University of Maryland economist. "The real problem is the slowdown or recession that it's caused.... It's really the lost growth and the taxes that we don't collect."

That's no small cost, however. The price tag of a banking crisis for ordinary Americans is large. It would rise if economic conditions worsen. And, for all the justifiable public outrage about bailouts for pinstriped bankers, the cost of not intervening to rescue the financial system would simply push the public costs even higher, finance experts say.

"To say we could just walk away from Fannie Mae or Freddie Mac without having some severe consequences is really questionable," says Tim Duy, an economist at the University of Oregon in Eugene. "The government does have to make that balancing act."

That balancing act, however, is becoming a fiscal tightrope.

And to the degree that a credit-crunched economy weakens the federal ledger – either through lost tax revenue or direct bank bailouts – one result could be a higher cost of borrowing for the government – a burden that would fall on all taxpayers.

"The credibility of the sovereign is now at risk," Mr. Morici says. "It is no accident that we're starting to see articles about the credit rating of the United States."

In April, analysts at the credit-rating firm Standard & Poor's said that if a recession became severe, the cost of propping up Fannie Mae and Freddie Mac could put downward pressure on the US Treasury's sterling credit score.