American rescue bid could cost £1 trillion

Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke hope to unveil their proposals on Monday, with the most likely option being to establish an $800 billion fund to purchase so-called failed assets, and a separate $400 billion pool at the Federal Deposit Insurance Corp to insure investors in money-market funds.

They say they will need legislative support for their scheme, and key US politicians have pledged to pass any necessary measures within days.
But questions are being raised over whether even the US government's pockets are deep enough. Estimates of the eventual price the US taxpayer will have to pay to end the credit crisis vary from $500 billion to $2 trillion.

Kenneth Rogoff, an economics professor at Harvard, believes that it will cost between $1 trillion and $2 trillion. Even at the lower end of that range, the cost would be twice what the US paid in today's dollars to end the savings and loan crisis in the early 1990s.

"It sounds like there's going to be a giant dumpster for illiquid assets," said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management.

"It brings up the more troubling question of whether the US government is big enough to take on this whole problem, relative" to the size of the American economy, he told Bloomberg.
The federal government is already saddled with a record budget deficit that is tipped to reach $500 billion by the time the next President heads for the White House.

Washington will still have to pay for two costly wars and find tens of trillions of dollars as baby boomers retire and begin collecting Social Security and medical benefits.

While the leaders of the House of Representatives and the Senate, who met with Bernanke and Paulson, say they will rush through the necessary laws, there are rumblings about the scale of bailout already promised.

They include the $29 billion that Bernanke committed to back the takeover of Bear Stearns, the $200 billion Paulson pledged for Fannie Mae and Freddie Mac and the Fed's $85 billion for AIG.
"We cannot protect all risk in the market, and we shouldn't do it at the risk of the taxpayer,"

Senator Richard Shelby, the ranking Republican on the Senate Banking Committee, says.

Worst of all, economists say, is the growing concern of foreign investors about putting new funds into the US. Sovereign-wealth funds invested just $900 million in new capital in US and European financial institutions so far this quarter, down from $6.43 billion in the second quarter, $19.7 billion in the first and
$28.5 billion in the last three months of 2007.