China’s new bailout package has been set up to make the US government look cheap. At $586 billion its ratio to GDP is impressive. The CIA Factbook puts the GDP on the mainland at between $3 trillion and $4 trillion, about a quarter of the number for the US.
China’s program is meant to drive consumer spending as a way to offset a sharp drop in exports which is likely to worsen as the world outside the world’s most populated country cannot support demand for its relatively inexpensive goods.
China’s government does have access to huge pools of capital. Its sovereign fund has an estimated $200 billion, all provided by the communist party. Of course, China could also sell the hundreds of billions of dollars in debt that it owns to fund its stimulus programs.
If the Chinese have calculated their economic stimulus package correctly, an American equivalent would have to total at least $2.4 trillion. While it is not fair to compare a centrally-controlled state with a country that considers its economy to be brazenly capitalistic and relatively unregulated, a dollar of GDP is a dollar of GDP .
So far, the US government has settled on the $700 billion Paulson plan as the right amount to fix what ails the economy. The Fed has some other loan programs in place for short term capital needs at banks, but that money is not anything close to the outright grants that the Treasury is trading for bank shares.
What the American government has not done, at least yet, is pay people’s mortgages for them. While that may be a good idea, it would require several hundred billions more. JP Morgan recently said it would rework as much as $70 billion of its mortgage portfolio to keep people from facing foreclosures in the short term. However,the bank does not propose to pay out or forgive even a fraction of that. And, JPM holds only a relatively small portion of the total US mortgage pool. Any real mortgage relief program which hopes to put a floor under falling housing prices will have to address at least the $6 trillion of mortgages not guaranteed by one of the US government housing agencies.
The most expensive problem facing the Congress and the new administration is that of the unimaginable deficits that will overwhelm local and state governments. As tax bases fall due to a faltering economy, this disappearing tax revenue will prevent the delivery of basic services to citizens and certainly derail the payment of bonds taken out by these municipalities. At least 29 states are grappling with a cumulative shortfall of $48 billion, according to the Council of State Governments. And that does not cover a problem which may actually be larger–the unfunded benefits and pensions of state and municipal workers.
The troubles of the auto industry are dwarfed by the mortgage and municipal catastrophes, but with each of the car companies losing a billion a month, the government cannot assume that it will cost anything less than $40 billion in direct investment to save the American car business. Consumer demand for vehicles is likely to drop again next year, so, if anything, losses at The Big Three will get worse.
When Lyndon Johnson coined the term "domino effect" he could never have imagined that it would apply to US industry. If the car companies are going to be bailed out, there will be demand from other industries, probably led by retailing and airlines. Who will decide which camel makes it through the eye of the needle?
If the Chinese have the right idea, the US government is going to have to come up with a sum at least four times what Paulson got on his trip up the Hill.
Douglas A. McIntyre