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Debt worries? What debts?

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by Peter Switzer

The Dow Jones hit a two-year high overnight and you can thank the interfering governments of the world for this achievement. And for those worried about the debts that remain, possibly you are worrying too much.

One of the greatest concerns out there spooking nervous investors is the debt that the US has racked up in trying to stop the market meltdown of 2008 turning into a Great Depression Mk II.

Cheap bailout

But guess what — this bailout was a lot cheaper than you think.

A Reuters story here in the US says compared to past crises, this rescue program was a cheapie! In fact, Treasury Secretary Timothy Geithner thinks ultimate net cost will be around US$25 billion.

He thinks the taxpayer will profit from the repayments of the banks, AIG, the car markers and other financial institutions.

Remember the US administration earmarked US$700 billion on the Troubled Asset Relief Program or TARP, which was ridiculed by those who don’t like Government interference or what is sometimes called — rightly or wrongly —Keynesian economics.

Money lost

However, Mr Geithner expects to lose money on the housing sector bailout. He says the total direct costs will be less than one per cent of GDP.

"The overall costs will be incredibly small in comparison to almost any experience we can look at in the United States or around the world,'' he told the Congressional Oversight Panel.

He told the group that his $25 billion cost figure could be too high.

The early belief was that TARP would be a US$350 billion black hole but recent estimates suggest it will be closer to US$30 billion. However, these guesses were made when the economic outlook for the US economy was not as bullish as it looks now with the Bush tax cuts and unemployment relief was to be extended.

In the past, the savings and loan crisis of the 1980s and 1990s cost closer to 2.4 per cent of GDP.

Recently Treasury pocketed a better than expected IPO result after bailing out GM and AIG is expected to be re-listed next year.

If no intervention?

For those who opposed the intervention, they argue that it would have fixed the problems more quickly but there’s no proof for this argument. And what about the cost that could have resulted if unemployment had gone to 15 per cent or higher?

Geithner summed it up: "The true cost of this crisis to the economy —the jobs, wealth and growth that it erased—is much higher [than the direct cost], but that damage would have been far worse without the government's emergency response.”

And in my view he is 100 per cent right. Those who disagree would have been gambling the economic theory that a free market solution to a potential Great Depression would be better than one that’s driven by benevolent interference.

Thank God the governments of the world opted for interference.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, December 17, 2010