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October 27, 2008 02:00 AM

Pieces of bailout pie may bring heartburn

Don Loepp
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    (Oct. 27, 2008) — No one in Washington wants to be responsible for starting a new Great Depression. And they'd all like to be able to take credit for stopping one from happening.

    So the checkbook is open, and we're pulling out all the stops on bailing out everyone — well, just about everyone. I haven't noticed any plastics processors or their suppliers on the list.

    We've pledged $700 billion to buy bad loans and securities, $29 billion to help JPMorgan Chase buy Bear Stearns, $85 billion for AIG and $200 billion to set up a conservatorship for Fannie Mae and Freddie Mac.

    And we're not finished. No one will be surprised if at least one of the Big Three carmakers comes looking for a bailout in the next few months — and I wouldn't bet against all three. Some regional banks might fail, and the government will be guaranteeing all of their deposits. Maybe we'll see the government sweetening the pot to convince buyers to take them over.

    The total price tag of this credit crunch is growing fast — at least $1 trillion, and maybe several times that large.

    You know what they say, a trillion here, a trillion there, and pretty soon we're starting to talk about real money.

    Do the numbers scare you? Should we care about debt?

    Let's put the numbers into some context:

    According to the Oct. 20 Barron's, the U.S. defense budget for fiscal 2009 will top $515 billion, plus another $700 billion for the wars in Iraq and Afghanistan. That total is slightly more than the rest of the world's military spending combined — China is at No. 2 at $65 billion.

    So the $1 trillion we're paying for the bailout is smaller than the $1.2 trillion we pay for defense every year. I'm not arguing that we need to cut defense spending — I'm just putting it into perspective.

    But let's not stop there. Social programs dwarf U.S. defense spending, and we're not just talking about welfare. Again, also according to Barron's, current and future U.S. workers owe more than $12 trillion to support the present and future beneficiaries of Social Security. We also owe more than $140 trillion for Medicare, and another $170 trillion for Medicaid.

    Those aren't single-year expenditures. The current-year cost of Medicare is closer to $412 billion. But the rules we live by under the current system, combined with demographic changes to the U.S. population make bigger expenditures in the future inevitable. Baby boomers are getting older, and there are fewer workers in the system to pay for their golden years.

    Alan Greenspan, testifying before Congress on Oct. 23, called this a “once-in-a-century credit tsunami.” I hope he's right. But let's not lose sight of the other threats to our fiscal well-being — and deal with them before it's too late. And remember, too, that if our economy suffers as a result of the credit crunch, it will just make the federal budget deficit numbers worse, because if people (and companies) have less income, there will be less to tax.

    Whether you're Joe Toolmaker or Joe Entrepreneur, you're going to be paying for all this sometime in the future. So cross your fingers and hope it works.

    Loepp is managing editor of Plastics News and author of The Plastics Blog.

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