What $700 billion bailout and more means to national debt

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From: The Concord Coalition

$700 Billion Market Bailout: Piling on more Debt

The Administration released over the weekend proposed legislation that would give the Secretary of the Treasury sweeping authority to purchase "on such terms and conditions as determined by the Secretary" up to $700 billion of "mortgage-related assets from any financial institution having its headquarters in the United States."

The Treasury would issue new Treasury debt to finance the purchases. In order to accommodate the new debt, the bill would increase the statutory limit on the public debt to $11.3 trillion. When the Bush Administration took office in 2001, the public debt was half that amount, at $5.7 trillion.

There is ongoing discussion among congressional staff, and the Congressional Budget Office (CBO) and the Office of Management Budget (OMB), about how to "score" the Treasury purchases. The draft legislation states that the "cost of mortgage-related assets...shall be determined as provided under the Federal Credit Reform Act...." However, this would be an odd formulation, since the Credit Reform Act applies to direct loans and loan guarantees originated by the government -- not the purchase of market assets.

Regardless of how the "scoring" issues are resolved, the bottom line is that the Treasury would be borrowing up to $700 billion in order to purchase mortgage-related assets--and this borrowing would add substantially to the public debt, and U.S. indebtedness to foreign lenders.

Of particular importance, the ballooning debt would add substantially to annual interest payments by the Federal government. Net interest payments, already nearly $250 billion per year, consume more than one in five income tax dollars. The new Treasury borrowing would take an increasing bite out of income tax revenues--and leave future generations with the tab for this generation's market meltdown.

The bailout legislation is likely to be added to a Continuing Resolution that Congress must pass by September 30, 2008 in order to keep the government functioning when the new fiscal year begins on October 1.

The Exploding Public Debt

Since 2001, the debt held by the public has increased from $3.3 trillion to $5.4 trillion, and total public debt has increased from $5.7 trillion to nearly $10 trillion, due to deficit-financed tax cuts; two deficit-financed wars; a recession in 2001-02; and a deficit-financed expansion of Medicare (the prescription drug plan). In recent weeks, several actions have been undertaken or proposed that could swell debt held by the public to more than $6 trillion and total public debt to more than $11 trillion. These include:

--$700 billion: Proposed authority for the Treasury to purchase distressed mortgages to ease the credit crunch

--$85 billion: Federal Reserve loan to AIG (American International Group)

--$29 billion: Federal guarantees to allow Bear Stearns to be purchased by JP Morgan Chase

--$25 billion: CBO estimate of the Federal bailout of Fannie Mae and Freddie Mac


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