30 September 2008

Fun with Numbers










So the proposed rescue plan that failed to pass yesterday but which will likely pass within the next 10 days will cost about $700,000,000,000 (11 zeros in seven hundred billion folks), and the Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. So we're looking at a total of about $1.3 trillion.
$1,300,000,000,000,000 ... among 200,000,000 American adults.
This ultimately comes from American's pockets including a chunk from businesses owned by Americans and in proportion to overall income (i.e., our proportionate tax system which asks the rich to pay more as a percentage of their income ... you make $50,000/year and pay 31%, your boss makes $150,000/year and pays 35% ... kinda).

So, on average, the rescue plan will cost each American:
$1,300,000,000,000,000 / 200,000,000 =
$13,000,000 / 2 =
$6,500

But,
what will the cost be to each of us if the rescue plan fails to pass? That's harder to guesstimate, but let's say American's have 10 - 30% of their assets in the market and another 10 - 40% of their assets are affected by the market (because lack of financial instruments to lend easily affects payrolls, housing values, etc). Let's just say 50% of assets could be negatively impacted for your Average Joe (more for those with more, less for those with less).

Say you have $200,000 in retirement savings and $200,000 coming to you from your pension. You have a house worth $350,000,000 that is mostly paid off. Your net worth is about $750,000,000 and we're guessing half of that could be negatively affected to varying degrees.

So $325,000,000 of your assets are put at risk by failure of a rescue package (assuming it would work which is something of a massive assumption given how poor the plan is as of today). Even if the markets tanked and lost another 2,000-3,000 points (or 20-30%), housing values continued to decline (say another 15-20% over 10 years), and you pension was not able to meet its obligations to you (maybe 10-20% of that $200,000,000) we're talking about a loss of about:
(1) 25% of the portion of your invested retirement savings, about $2,500.
(2) $40,000 from the value of your house.
(3) $15,000 from your failing pension.
Total ~ $57,500 lost from your $750,000,000 net worth.

Simplified:
$57,500 over the next 5-10 years from no rescue plan
vs.
$6,250 to pay for the rescue plan + maybe $25,000 from deflating home values and market revaluations

More simply:
Do nothing, lose $57,500 vs. rescue plan that works okay still loses you $32,500

What our congress critters don't seem to be able to communicate to us is that both situations suck and this will mean a very different idea of what to expect out of retirement for those facing it relatively soon (i.e., next 10 years). But they all seem to understand (though cannot explain to to the "low information" or "undecided" or "swing" voters without pissing them off) that passing a rescue plan will be better for people in the long term (again, assuming it works fairly well but even if it's terrible, will restore some market confidence and allow for more banks to lend more money in the short-ish term). Congresscritters are driven by 2 year timeframes between elections, they may be paid to consider what's best for their constitutients in the long run, but they certainly know what's best for them in the short term ... and having their name on this is bad as can be for re-election. Throw into the mix more than a few congressmen who know that this rescue plan is actually quite bad and genuinely draws out their ideological and intelectual disagreement (think Lynn Woolsey) such that they can't back it and there's no way it can pass.

I'd call this setting up failure with an electoral system that has perverse incentives for serious change ... to do the right thing requires self-sacrafice from people who are elected because of their illusions of grandure, people who make calls for millions of dollars in donations nearly every day for years and years just to stay in office ...

In otherwords, a rescue bill will pass, it will likely be so bad that it may not be much better than passing nothing at all because each option will end up costing folks about the same ... but the thing to remember is that each approach will cost a dear amount and much of the rest is guesswork about minimizing a number most people are unaware of and perhaps anxious about as a result of that unknown value. That fear alone is a huge part of the problem pushing aside reasoned approaches for rhetoric and fense-sitting numbnuts like McCain who just want to come out ahead politically no matter which way the issue actually falls in the end ... this kind of ignorance driven fear is the worst position to ask for something from government and it's the worst kind of leadership from government.

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