Why is $700 billion the magic number?
For all we know, Treasury Secretary Henry Paulson licked his finger, stuck it the air, and said "Right, 700 billion." How was that figure arrived at? Dan Grech reports.
Dollar bill notes pass through a printing press at the Bureau of Engraving and Printing in Washington, D.C. (Alex Wong/Getty Images)
More on Wall Street, Fed. Budget/Govt. Spending, America's Financial Crisis
TEXT OF STORY
KAI RYSSDAL: $700 billion is the magic bailout number. But for all we know Henry Paulson licked his finger, stuck it up in the air and said, "Right, 700 billion."
We asked Marketplace's Dan Grech to find out what really happened.
DAN GRECH: Why 700 billion?
JOSH ROSNER: Nobody knows. Um, nobody knows.
That's Josh Rosner. He's an expert on mortgage-backed securities at Graham Fisher & Company. Rosner says you can't answer the $700 billion question because . . .
ROSNER: There's such interconnectedness in our financial system. And so no one is really sure where one company's balance sheet ends and another's begins.
It is estimated that bad home loans could cause losses of between $500 billion and $1 trillion. Economist Vincent Reinhart worked for the Federal Reserve for 25 years.
VINCENT REINHART: It was arbitrary. It was intentionally a big number so it would be large enough to contain the problem.
Reinhart says the bailout also had to be big enough to calm panicky markets.
REINHART: I don't think there's a simple arithmetic to this process. The bottom line is we are entering uncharted territory.
One thing's clear: It's a whole lot of money. Roughly $2,300 for every man, woman and child in the country.
I'm Dan Grech for Marketplace.
Comments
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From MO, 09/30/2008
I say we mortgage holders unite, if congress doesn't fully work together, and maybe we can add some long sought changes like banning the electoral college, than we will hold our december mortgage payment, spend it on Christmas since the gov is going to cover us, extend the mortgage, it just dissappears afterall all our mortgages are bundled in barrels being covered int he bail out.
Its time to re-sit the congress, a national referendum, vote of no confidence and redesign the governemtn.
From Austin, TX, 09/25/2008
I figured out where the $700b figure came from. It is an estimate of the sum of the foreclosed principal in the housing market:
3 million foreclosures x $235k mean value = $705 billion
The question is, why do we not consider refinancing the foreclosures directly, thereby really giving a bottom to valuation, and securing at least some profits for all investors, even they are reduced. Please tell me why this not being considered???
From Grand Blanc, MI, 09/25/2008
I would like to know how this country could go from "fundamently sound" to "economic meltdown" practically over night? I think it's all to do with the Russian/Georga conflict, and the fact that we are in debt to the Russians.
I stumbled across this article that could explain the $700B figure Paulson is asking for.http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2793309/US-faces-global-funding-crisis%2C-warns-Merrill-Lynch.html This bailout will not help mainstreet, it will only help the oil companies fighting over oil rights around the world.
From Grayling, MI, 09/25/2008
The proposed $700B bailout is another ill-attempt by the US Government - and big
business supporters - to only enrich themselves. You can fight your own wars
from now on, because I won't!!!
From Austin, TX, 09/24/2008
Perhaps I'm not well-read enough, but I haven't heard people asking or answering this question: If you are applying for a loan say 6 months from now, does it make a difference that you can't get a loan because of frozen credit (the do nothing approach) or because of hyperinflation (bail-out approach)? My answer is that it does make a difference. Frozen credit will not stay that way for long, a trickle will eventually turn into a stream because that is the primary function of the lending business. Hyperinflation on the other hand can bring an end to a currency. Besides, if we don't bail out the wall street gamblers, we don't reward them for their gambling at the express expense of the hundreds of thousands who have been living in poverty because of wall street's activities. I mean, all that money that wall street made came from somewhere, right? I have not heard one iota of evidence that doing nothing will have worse consequences, only rhetoric from those who would profit from the bail-out.
From nashville, TN, 09/24/2008
Bernanke said this morning in committee hearing that THE magic number was equal to roughly 5% of the total mortgage market, or some such hocus pocus.....
Sounds like voodoo economics to me....or finance seminar 101....I would give him a c minus......at best. Someone needs to slow down, breathe deeply, and refocus.
From nashville, TN, 09/24/2008
Bernanke said this morning in committee hearing that THE magic number was equal to roughly 5% of the total mortgage market, or some such hocus pocus.....
Sounds like voodoo economics to me....or finance seminar 101....I would give him a c minus......at best. Someone needs to slow down, breathe deeply, and refocus.
From nashville, TN, 09/24/2008
Bernanke said this morning in committee hearing that THE magic number was equal to roughly 5% of the total mortgage market, or some such hocus pocus.....
Sounds like voodoo economics to me....or finance seminar 101....I would give him a c minus......at best. Someone needs to slow down, breathe deeply, and refocus.
From New London, CT, 09/24/2008
What happened to the $800billion congress already approved in July for Paulson to spend on relieving forclosures and saving Fannie Mae & Freddie Mac? Did we already spend that money? If Paulson couldn't curb this crisis in the past two months with $800billion, why are we supposed to believe he can do this all by himself with $700billion?
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