"Bailout" -- Oh, Why in God's Name Did They Decide to Call It THAT?

Oct 2, 2008

Since this is my first posting on “Painting with Numbers,” it seems completely appropriate to talk about words instead of numbers. And just one word, at that. And that word is. . . “BAILOUT”! OK, there’s another word, too: “SPEND.” What does this have to do with “numbers”, and how we “paint” with them? A lot.

At the heart of the opposition to the bill that failed on Monday is the notion that we are “spending” $700 billion, or maybe even $1 trillion, of the taxpayers’ money in order to “bail out” a bunch of corporate fatcats who don’t deserve a helping hand.

Suppose your broke college buddy got arrested in a bar fight and had his car towed, and you paid his fine and the towing fee, just so he could get to his wedding. That was your money, and now it’s gone forever, but at least your buddy got married. Now, that’s a “bailout.”

On the other hand, suppose instead you just bought his car for $400 so he could afford a plane ticket home, and thereby make it to his wedding. Did you “spend” $400? Well, sort of. But you also now have a car worth $400, or maybe much more, if your friend was really desperate.

Under the legislation Congress was (or maybe is) considering, the government would BUY about $700 billion worth of mortgages and other loans from financial institutions that will now do something else (and, God willing, something smarter) with that cash.

So let’s get this discussion onto the right plane. The U.S. Treasury will get some, or all, or maybe even more than all of the $700 billion back. Exactly how much depends on:

1. How many foreclosures there actually will be
2. What the houses Uncle Sam will own, from those foreclosures, turn out to be worth
3. The kind of deal Uncle Sam can cut; i.e., how desperate the financial institutions are for some liquidity
4. How far in the future Uncle Sam gets its money back We can have a long, long argument about the exact amounts, but the odds that the U.S. Treasury will end up with ZERO – i.e., they will “spend” the entire $700 billion – are about the same as the odds that you will get eaten by a shark. Twice.

You can oppose the “rescue” – let’s skip the “B” word – on the moral grounds that you don’t think government should meddle in markets. Or because you don’t think there’s really a crisis. Or because you think there’s a better way to do it. Or because the deal just isn’t good enough for the taxpayers. But it’s a sad thing when it all goes down the tubes because people refuse to understand how the numbers work. This isn’t rocket science. But it isn’t bumper stickers, either.

“Painting with Numbers” is my effort to get people talking about financial statements and other numbers in ways that we can all understand. I welcome your interest and your feedback.

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