Uncle Sam's Growing Tab

[EV_Ares]

America was facing the mother of fiscal time bombs before this week. Now, it faces another.

The government's plan to take hundreds of billions of dollars in bad loans from stressed banks could cause the national debt to rise through the end of this decade. That is nicely timed to coincide with the enormous cost of shoring up Medicare and Social Security, as baby boomers retire.

Don't be surprised if the dollar and Treasury bonds weaken as the fiscal math gets done. The numbers could get scary.

Excluding the bad-loan plan, the feds had already made more than $600 billion available for bailouts for Bear Stearns, American International Group, Fannie Mae, Freddie Mac, underwater homeowners and money-market funds.

The extra cost of relieving banks of their toxic assets could be between $500 billion and $1 trillion, going by preliminary reports.

It is impossible to guess the final cost. But $1 trillion would be equivalent to 7% of GDP and more than 10% of the outstanding national debt. To wit, after seizing Fannie and Freddie, the government now stands behind $5 trillion of mortgages, or nearly half of all home loans outstanding. And the government now appears to account for more than 80% of new mortgage lending.

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