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It would be counter productive to add the $700 billion to the budget deficit calculation if the proposal goes through and is executed, since Congress is likely to take measures to somehow constrain spending or increase revenues to try to ‘pay for it’. This would be highly contractionary at precisely the wrong time.

Note that if the Fed buys mortgage securities it doesn’t add to the deficit, while the Treasury buying the same securities does? And in both cases treasury securities are sold to ‘offset operating factors’; either way, Fed or Treasury, the government exchanges treasury securities for mortgage securities.

When any agent of the government buys financial assets, that particularly spending per se doesn’t add to aggregate demand, or in any way or directly alter output and employment.

Yet here we are listening to the Fed Chairman, the Treasury Secretary, and members of Congress talking about $700 billion of ‘taxpayer money’ and a potential increase in the deficit of $700 billion.
And no one argues with statements like ‘it is even more than we spent in Iraq’ and ‘that much money could better spent elsewhere’. Unfortunately for the US economy, this supposed addition to the deficit is likely to negatively impact future spending, perhaps at the time when it’s needed most to support demand.

I recall something like this happened in 1937, when revenues collected for social security weren’t ‘counted’ as part of the Federal budget, and the millions collected to go into the new trust fund
were in fact simply a massive tax hike. Unemployment went from something like 12% to maybe 19% (and stayed about that high until WWII deficit spending brought unemployment down to near zero). After that happened much was written regarding public vs private accounting and the cash flow from social security and other programs was subsequently counted as part of the federal budget calculation, as it is today, and for the same reason.


6 Responses

  1. first, the paulson plan won’t add to demand or do much, if anything, for market functioning.

    second, at the macro level real wealth can increase if we move mba’s out of the financial sector to the real sectors. for example, more and better teachers and healthcare workers can add to the quality of life, slicers and dicers of securities don’t.

    but it’s not up to individuals to take that initiative. it has to come from the top down.

  2. “first, the paulson plan won’t add to demand or do much, if anything, for market functioning.”

    Doesn’t a bid from the gov’t for mortgages/mbs help jump start the secondary market?

  3. This is starting to scare me. For a long time I’ve thought that even though the financial powers that be were clueless and a that a full on Keynesian “functional finance” approach (include ELR) would be a lot better, there was at least enough horse sense to not let everything melt down. I no longer feel that. It looks like the best case scenario we’re facing is a Japan-style decade+ of stagnation, with any recovery due to stimulus ultimately sabotaged by “fiscal prudence”. Worst case is Great Depression 2.0…

  4. At this point it is looking more and more like congress will do nothing with respect to this bill. There is so much consternation about some of the more egregious elements of the bill, and so little trust for the administration left, that they may just sit on this. With a self-imposed deadline of friday looming, this boiling down to a contest of wills between Heir Bush and Congress.

    This is all eerily similar to the Iraq War legislation, which was rammed through congress on the eve of congressional recess in 2002. How many other bills… patriot act, wiretapping, torture… has the administration handled in just exactly the same way, every time using crises to usurp authority that ought to be vested in the democratic process and instead vesting it in the hands of individuals, virtually every time also attaching these provisions regarding no oversight and no recourse.

    I have to say, I sincerely hope congress does not react to these same pressures this time around. Maybe something needs to be done, but that something doesn’t include creating a non-elected post with the power to rule the financial system with impunity.

    These kinds of machinations do not have anything to do with fixing the problem. Put another way, how is it, exactly, that giving the tsy sec. such sweeping powers will ‘fix’ the problem of all this worthless paper? The two are unrelated, so one might wonder why such provisions found their way into this bill.

    If the bill does not pass, it will be because of the outlandish provisions the administration placed within it. And, I have to say, in the form it was introduced, I sincerely hope it does NOT pass.

    All that said, should the core provisions of the bill be preserved, or does this bill simply not do anything to address the real issues?

  5. Warren; what do you think of Buffett’s statements on CNBC concerning the gravity of the situation?


    Buffet said that we were last week on the brink of a situation that would have paled anything in financial history. He also indicated that his actions with respect to GS are predicated on his expectation that congress will in fact act on this ‘bailout’ proposal.

  6. rsg- maybe, but it won’t affect agg demand, seems

    jim- you may be right, but the deficit is creeping up some so it might not be that bad.

    tt- i don’t see the bill doing much of anything.

    yes, the financial sector could have gotten a lot worse, but if govt maintains agg demand via fiscal balance output and employment and our standard of living would be sustained.

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