Posted by: Tobias | October 1, 2008

$700bn talking point

Duncan Green, the Head of Research for Oxfam GB has a blog post up today in which he puts the $700bn of the Paulson bailout plan into perspective:

$700bn:

  • Would clear the accumulated debt of the 49 poorest countries in the world ($375bn) twice over
  • Is almost 5 times the annual amount of extra aid needed to achieve all the Millennium Development Goals on poverty, health, education etc ($150bn a year)
  • Is about 7 years of current global aid levels ($104bn in 2007)
  • Is enough to eradicate all world poverty for over two years (UNDP calculates it would take $300bn to get the entire world population over the $1 a day poverty line).

As much as I agree that some of our priorities in foreign aid are very messed up indeed, can we please stop using this silly $700bn talking point?

$700bn will not – in all likelihood – be the total cost of the bailout to the taxpayer (which is why the over $3,000 per citizen is equally silly). It is the total amount of money the Treasury may use to take distressed assets off the banks’ backs. The only situation in which the cost to taxpayers will be the full $700bn is if every single asset the Treasury buys turns out to be worth absolutely nothing, i.e. in case none of the cash flows to which the asset gives the holder ownership materialize. And as bad as the current crisis is, this just isn’t very likely.

In all likelihood the losses to the taxpayer will be far, far less than the full amount. It is even conceivable (though perhaps not very likely either, depending on how exactly the Treasury determines the prices it will pay for various derivatives that haven’t been traded for weeks now) that Treasury will make a profit on its ‘investment’.

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Responses

  1. Good point. That’s the aspect I am also missing quite a bit in the recent media coverage (and political discussions). This doesn’t mean of course that this bail-out is still massive in size, and can still be criticized on other grounds.

    As to the comparisons made in the article:
    you might of course also perceive financial aid to highly indebted countries as a financial investment, which should (partly) pay back through various channels (export opportunities, increased political stability, etc.). Given the poor governance in most of these countries however, the financial return to this investment would most likely be negative.

  2. Although vague, I heard some days ago an economist on the Dutch radio mentioning that the actual size of the bad mortgages portfolio is actually 20 times as large as the amount reserved. Acknowledging the point that the money isn’t completely lost , I would say there is a big chance, if the above statement is true, that the government ends up with the worst part of the overall portfolio hence increasing the chance of a very small return.

  3. No, no, no. There is no such thing as an intrinsically worst part of the portfolio. Even mortgage-backed securities which suffer a default rate of 90 percent would be a good investment if you get more than a 90 percent discount on their face value. The question is merely whether Treasury will succeed in revealing the true values of these assets (and whether they even want to do this).


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