A Trillion Here, a Trillion There. . .
posted by Frank Pasquale
and, as a latter-day Everett Dirksen might say, soon you’re talking real money. As Bilmes and Stiglitz have estimated, the Iraq War will likely ultimately cost three trillion dollars. Today’s Krugman column in the NYT suggests that the cost of bailing out ailing US financial institutions may approach these figures:
The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States. If these numbers shock you, they should. But the big bailout is coming.
Krugman pins the blame squarely on a market fundamentalism that blinded regulators to extraordinary risks accumulating over the past five years:
Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.
The deep irony here is that the same ideological movement that promised deep tax cuts for all may be delivering a staggering national debt that will assure everyone higher tax bills–paid out in large part to foreign owners of our national debt.
As I’ve mentioned earlier on this blog, Bob Kuttner has harkened back to the 1933 Pecora Hearings as an analogue for the type of fundamental re-evaluation of the financial order that we may need to do today. After having a decade of policy mirroring 1920s era laissez-faire, I hope we aren’t in for a replay of the 1930s.
March 17, 2008 at 8:45 am
Posted in: Bankruptcy, Corporate Law
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Responses (5)
Patrick S. O'Donnell - March 17, 2008 at 9:21 am
I found it interesting and a bit disturbing that Bilmes and Stiglitz believe, according to their “Opinion” piece in yesterday’s Los Angeles Times, that the cost of the war in Iraq “will fall especially hard on Californians,” of which I am one. They cite three reasons: 1. our state’s population is among the youngest in the United States, 2. the comparative wealth of our state’s residents: we already contribute 14% of federal taxes while we make up 12% of the nation’s population, and 3. we are being hit especially hard by the steep rise in oil prices. In short, we will feel disproportionately the costs of this war.
They conclude as follows:
“Beyond that, the ongoing cost of the war has made it more difficult for the federal government to pay for roads, schools, medical research and aid to local communities. And then there is the opportunity cost: The money spent on the war could have fixed Social Security for the next 75 years or provided health insurance to all U.S. children.
In California, with its fast-growing and diverse population, the opportunity costs are especially painful. Over the next two decades, greater Los Angeles needs to invest $20 billion in bus and rail and $150 billion for transportation generally, according to the draft Los Angeles County MTA plan for 2008. The bustling Port of Los Angeles and the Port of Long Beach require an infusion of $3 billion for vital environmental and security improvements, according to a recent statement from the Long Beach and Los Angeles boards of harbor commissioners. They are proposing to increase cargo fees yet again to raise revenue.
But as we enter the sixth year of combat, the “burn rate” for each month we continue in Iraq is $12 billion — with the full cost (including paying for veterans and replenishing equipment) easily double that.”
MADNESS, UTTER MADNESS…
David Bernstein - March 17, 2008 at 10:18 pm
I’m a free market ideologue, and I saw the problems coming, arising from Greenspan’s interventions in the monetary market to try to keep the U.S. out of recession after 9/11. A classic “Austrian” bubble. I blogged about my concerns on Volokh. I don’t follow Krugman’s colums. Did he blog about the problems ex ante? Did the Democrats who took over Congress in 2006 recognize the problems, since they aren’t free marketers?
Carl Bretanananewski - March 18, 2008 at 12:01 am
The last 10 years have been anything but ruled by “free-market ideology” or “market fundamentalism”. True classical liberals abhor the existence of a state-sponsored Central Bank and all the cartelization that comes with its existence. Please don’t impugn a valid set of beliefs you clearly do not understand.
bill - March 18, 2008 at 12:54 pm
Krugman has been op/ed’ing about the dangers of the housing bubble since 2005 and perhaps earlier.
http://www.nytimes.com/2005/05/27/opinion/27krugman.html
That’s pretty ex ante, considering that Bush/Cheney/Bernanke/Paulston still don’t seem to fully grasp what they’re dealing with.
I’m sure President McCain, with zero private sector experience at age 71, will be a quick study on these problems.
Maryland Conservatarian - March 19, 2008 at 3:15 pm
“I hope we aren’t in for a replay of the 1930s.”
Amen – 8 years of an FDR-style government would be a disaster
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