One crisis sows seed of the next?

Analysts warn about staggering cost of federal attempts to rescue economy

November 28, 2008|By Jim Puzzanghera | Jim Puzzanghera,Tribune Washington Bureau

With its decision this week to pump another $1 trillion into the financial crisis, the government eliminated any doubt that the country is on a wartime footing in the battle to shore up the economy. The strategy now - and in the coming Obama administration - is essentially the win-at-any-cost approach previously adopted only to wage a major war.

And that means no hesitation in pledging to spend previously almost unimaginable sums of money and running up federal budget deficits on a scale not seen since World War II.

Indeed, analysts warn that the nation's next financial crisis could come from the staggering cost of battling the current one.

Just this week, new initiatives added $600 billion to lower mortgage rates, $200 billion to stimulate consumer loans and nearly $300 billion to steady Citigroup, the giant banking conglomerate. That pushed the total estimated cost of the government's varied and numerous economic rescue initiatives this year to $8.5 trillion - a figure that represents half of the entire economic output of the United States this year.

Nor has the cash register stopped ringing. President-elect Barack Obama and Congressional Democrats are expected to enact a stimulus package of $500 billion to $700 billion soon after he takes office in January.

The spending already has had a dramatic impact on the federal budget deficit, which soared to a record $455 billion last year and began the 2009 fiscal year with an amazing $237 billion deficit for October alone. Analysts say next year's budget deficit could easily bust a previously unthinkable barrier - $1 trillion.

"I didn't think we'd see that for a long time," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "There's a huge risk of another economic crisis, a debt crisis, once we get on the other side of this one."

But the Bush administration, and the economic team Obama is rapidly assembling like a war Cabinet, is vowing to spend whatever it takes to avoid a Depression and worry about the impact later.

"I don't think that there's any way of denying the fact that my first priority and my first job is to get us on the path of economic recovery, to create 2.5 million jobs, to provide relief to middle-class families," Obama told reporters this week.

"But as soon as the recovery is well under way, then we've got to set up a long-term plan to reduce the structural deficit and make sure that we're not leaving a mountain of debt for the next generation."

The mountain is already there, and rising faster than at any time since the 1940s, when the United States was fighting a world war.

Analysts say the current flood of red ink calls into question Obama's ability to launch new programs such as middle class tax cuts and health care reform. For example, a deficit a third of the size of next year's projected $1 trillion caused President Bill Clinton in 1993 to abandon his campaign plans for tax cuts.

There is also a risk of higher interest rates and soaring inflation once the financial crisis eases. Such developments would trigger serious new economic problems.

"We could have a super sub-prime crisis associated with the meltdown of the federal government," warned David Walker, president of the Peter G. Peterson Foundation and former head of the Government Accountability office.

But even deficit hawks such as Walker acknowledge that dealing with the immediate crisis needs to be job one right now. Just as with World War II, the government can worry about paying the bills once the enemy is defeated.

"You just throw everything you have at the problem to try to fix it as quickly as you can," said David Stowell, a finance professor at Northwestern University's Kellogg School of Management. "We're mortgaging our future to a certain extent, but we're trying to do things that give us a future."

In addition, the amount Washington ends up spending may turn out to be substantially less that the sum of the commitments. While the total estimated cost of the government's efforts adds up to $8.5 trillion, only about $3.2 billion has been tapped so far, according to an analysis by Bloomberg.

And not all the money is direct spending. About $5.5 trillion worth of loan guarantees and other financial backing initiatives by the Federal Reserve are included in the total.

"The only way those commitments would become obligations would be if the economy completely collapsed, in which case it's a whole new ballgame anyway," said John Steele Gordon, a business and economic historian.

The government even stands to make money on some of its expenditures, such as the $330 billion in purchases of equity in banks and other financial institutions so far through the Treasury Department's Troubled Asset Relief Program.

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