Written by Jon Mercer in Economy
Viewed by 62 readers since 12-05-2008
To brace up the US economy, the government decided this week to add an additional $1 trillion to help out the financial crisis. The “win at all cost” strategy could run the federal deficit up to an outrageous sum not seen since World War II.
New initiatives added last week pumped $600 billion into lowering mortgage rates, $200 billion into stimulating consumer loans, and $300 billion to bailout Citigroup, the giant multi-national lending institution. Analysts are warning that our next financial crisis could come from battling the huge deficit caused by battling the current one.
The federal budget deficit has already risen to an alarming $455 billion. Analysts are predicting an over $1 trillion deficit for 2009. They base this prediction on the fact that President-elect Obama has vowed to enact a massive economic stimulus package worth between five and seven billion soon after he takes office in January.
The Bush administration and President-elect Obama’s newly assembled economic team are vowing to spend whatever it takes to avoid a depression and worry about the effect later. Obama has already stated that his first order of business is to create 2.5 million jobs to put the country on the road to economic recovery and provide relief for the middle class.
Throwing a ton of money at the failing economy could temporarily solve the problem. However, higher interest rates and soaring inflation could seriously increase the government’s borrowing cost to meet its annual debt payments. Still analysts say that our current economic crisis should be priority number one.
According to the LA Times, David Stowell, a finance professor with Northwestern University’s Kellogg School of Management, say’s “You just throw everything you have at the problem to try to fix it as quickly as you possibly can.” Washington could end up spending a lot less than the total sum of the commitments. Although the estimated cost of the government’s efforts add up to $8.5 trillion, only about $3.2 trillion has been used, according to an analysis by Bloomberg.
Also, about $5.5 trillion of the total estimated expenditure comes in the form of loan guarantees and other financial backing by the Federal Reserve; these funds are not committed to direct spending. Only if the economy totally collapses would these commitments become government obligations. But if this were to happen it really wouldn’t matter anyway: the rising deficit would be the least of our problems.
Encouragingly, the government does stand to make money off of some of the expenditures. The $330 billion it has used to buy equity in banks and other financial institutions, for example. This was done through the Treasury Department’s Troubled Asset Relief Program.