Is the Bail-Out Based on Debt Illusion?

You are absolutely right.

I don’t think it’s quite right. First, while the public outcry may be minimal, the outcry in private doesn’t appear to be. Rasmussen reported Tuesday that 44% of voters opposed the plan and only 25% supported it.

Second, the reason opposition isn’t higher may be because the debt might not have to be repaid, depending on the price Treasury pays for the distressed assets.

If your choices are big tax increase now and maybe lower taxes later, vs. no tax increase now and maybe lower taxes later, I can see why people favor the latter.

I disagree. The reason why a debt will work better is because much (most? all?) of those mortgages will actually work out so the government might even make some (accounting) profit on them.

If the proposal were funded by an immediate tax evenly distributed across the population in absolute–or even income-proportional–terms, sure, it would probably never even be considered.

But what if the tax were structured as a tax on people or institutions disliked by some predetermined majority of the population (rich people, foreigners, large corporations)? Put one intermediary step introducing the possibility of obscurable unintended consequences into the funding mechanism, and public opposition becomes only a possibility.

Only if voters actually paid taxes, which many do not. Also, those with anti-market bias or socialist tendencies are going to be happy about this.

Question: Can anyone guess how much of these assets the market would purchase if the feds didn’t do anything? Why is it assumed that the feds’ purchase of these assets will yield returns if the market does not purchase them?

The minimal public outcry, therefore, hinges on “debt illusion” – the mistaken view that debts, unlike taxes, never really have to be paid. Am I right?

I think so, in fact I’ve seen blogs outright say this bailout will be free. For example…

What will the bailout cost the taxpayers?

As I argued in my previous post, it will not cost today’s taxpayers anything. But what will it cost future taxpayers? I suggested in my last post that perhaps the government could roll over its debt indefinitely, and no taxpayers would ever have to pay it off….

Yes, Virginia, when it comes to financing government bailouts of financial assets, there is a Santa Claus.

Of course, $700 billion present value is a triviality compared to $40 trillion present value for Medicare. Would the citizenry have voted for Medicare if it had come with a tax bill covering that cost attached?

We got the answer to that back when Congress tried to make seniors pay a teeeny little tad of a premium towards the cost of a long-term care insurance benefit provided through Medicare that they actually need — and a mob of AARPers attacked Dan Rostenkowski in the street, litterally banging and rocking his car like he was driving though some third-world nation in the middle of a coup. Congress repealed that benefit quickly enough!

But what happens poltically when that deferred $40 trillion starts coming on budget about ten years from now?

In the big scheme of things this $700 billion, though it surely won’t be free, by itself doesn’t really matter to the finances of the US. The debt owed to the public today is a lot smaller than it’s been in the past — and it will remain so even if $700 billion is added straight to it.

Only five things really matter to the US’s finances: Medicare, Medicare, Medicare, Social Security and Medicaid.

But given those five things being in place as they are, this $700 billion only makes matters that much worse. Icing on the cake.

Shoot — let alone the bailout; I wonder how much of the *current* budget (excluding Iraq-related outlays, excluding bailouts) would pass, if it included tax adjustments (as though it’s conceivable it could require cuts!) necessary to raise sufficient funds in present value terms to pay for it…