How much should you worry about a $7 trillion bailout? Less than you think.

All of the bailout programs the government has announced so far fall into three categories.  Insurance, Investment, and loans.

Because of the nature of what the government is trying to do, there is a good chance that it will lose more in insurance claims than the revenues it realizes for insurance premiums, there’s a good chance that more of the investments will fail than the dividends it will receive, and there’s a good chance that more of the loans will default than the interest payments in receives.

That said, the amount of money that the government is likely to actually have to be paid back by taxpayers is probably in the low hundreds of billions, not the high single digit, possible double digit trillions.

To paraphrase someone a long time ago… “A hundred billion here and a hundred billion there, and pretty soon you’re talking about real money.”  Taking on a tax burden of hundreds of billions of dollars isn’t going to be very much fun.  Everyone is always free to make their own judgment about whether the good that will come from it outweighs the cost or not.  But when you hear people talking about the government spending $7 trillion or $8 trillion on the bailout… remember that the vast, vast, vast majority of that is coming back.

If you’ve been learning about credit default swaps, which are the financial instruments at the core of the mess, you may have heard that the “notional value” of all the Credit Default Swaps out there is in the neighborhood of $70 trillion!  This seems stunning because it is considerably larger than the Global Domestic Product.  While today’s unregulated credit default swaps pose such a gigantic risk for the economy that the worst economic collapse since the 1920’s is because of them… the risk isn’t $70 trillion worth.  CDS are basically insurance policies, so the $70 trillion refers to the amount the insurers would have to pay if every policy had to suddenly be paid out in full.  This would mean that every single bond, for every single company and country in the world got defaulted on in one day.  There is a range of bad and while our CDS problem is bad, it isn’t $70 trillion bad.  That’s similar to our situation with the bailout.  We’re talking about incurring, in all likelihood, a lot of new debt for the taxpayer to pay back… but not $7 trillion worth by any stretch of the imagination.

It seems unlikely, but there is still even a possibility that the government will end up making huge profits from all of these business activities.

Here is a great article that goes into more detail about this and also links to a New York Times chart showing the actual commitments.

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