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How bailout deal will impact next president

A $700 billion US rescue of banks is not likely to crimp McCain's or Obama'sspending plans, at least in the short term.

By Staff writer / September 28, 2008

DEAL OR NO DEAL: Treasury secretary Henry Paulson sat in the office of House Republican Leader John Boehner during negotiations on a $700 billion bailout at Capitol Hill Saturday.

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While rarely in Washington, presidential contenders John McCain and Barack Obama are keeping a close eye on the massive rescue of US financial markets working its way through Congress.

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One reason: As president, one or the other will have to live with its outcomes.

But neither candidate expects to have to lop $700 billion – the expected level of funding for the plan – off their presidential wish lists – and experts say they may be right, at least in the short term. (The latest version of the legislation, released late Sunday, is available at http://financialservices.house.gov.)

Asked in their first presidential debate in Oxford, Miss., on Friday what each would give up to pay for the rescue plan, neither candidate offered up anything cherished.

Senator McCain, the Republican nominee, said he'd cut pork barrel projects, slash ethanol subsidies, terminate cost-plus defense contracts, freeze non-Defense and non-Veterans Affairs discretionary spending, and "scrub every agency of government." But for the freeze, these are all positions he has advanced in the past.

Senator Obama, the Democratic nominee, said that "there are going to be things that end up having to be deferred and delayed," but added that they would not be investments in energy independence, health care, education, or infrastructure – his top four priorities.

Pressed by moderator Jim Lehrer to name something specific he would be willing to give up, Obama proposed axing $15 billion in Medicare subsidies to private insurers – a GOP program.

So, why doesn't a $700 billion program mean $700 billion less for a new president to spend? The answer lies in accounting conventions that are often misunderstood – and, critics would add, not well suited to the nation's current financial crisis.

"People will find it hard to believe, but the bailout will have very little impact on the budget or the deficit," says Peter Morici, a business professor at the University of Maryland and the former chief economist at the US International Grade Commission.

What the government is going to do is to sell bonds, get cash and use that cash to buy mortgage-backed bonds originally created by the banks. These bonds will be purchased at a discount and the government will hold them to maturity, says Mr. Morici.

"If the government loses any money, it will be because it overpaid for the bonds – and in any case, the budgetary impact is not large," he adds. "It will be stretched out over several years.

The House Budget Committee tried to get a handle on this issue in a hearing last week with the Congressional Budget Office.

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