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Home Publications Blogs Beat the Press Counting European Bailout Costs at the Washington Post

Counting European Bailout Costs at the Washington Post

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Wednesday, 16 June 2010 04:40

The Washington Post had a front page article on how delay has raised the cost of the Greek bailout effort. The article told readers:

"the cost of helping Greece avoid default increased about fourfold, to $140 billion from roughly $35 billion at the start of the year. Confidence in the European economy was so badly battered that European leaders together with the IMF had to pledge another nearly $1 trillion to reassure investors."

While the point about the cost of delay is well-taken (it would have been easier to reassure markets with a strong commitment early by the European Central Bank and the IMF), the measure of costs is very misleading. The $1 trillion figure is a measure of loans and guarantees, not actual outlays. During the U.S. financial crisis, the Fed and Treasury extended more than $10 trillion worth of loans and guarantees by some measures. The overwhelming majority of this money involved guarantees that were never actually needed or loans that were repaid in full. This is likely to be the case with the European commitments as well.

It is important to make the distinction between this sort of confidence building effort and actual money out the door. The Washington Post and other news outlets were able to make this distiniction quite effectively with the U.S. bailout (in fact, they have misleading reported that the government has made money on these bailouts). Presumably they can apply the same analytic skills to their discussion of Europe's bailout.

Comments (8)Add Comment
...
written by izzatzo, June 16, 2010 10:39
... the measure of costs is very misleading. The $1 trillion figure is a measure of loans and guarantees, not actual outlays ... The overwhelming majority of this money involved guarantees that were never actually needed or loans that were repaid in full ... It is important to make the distinction between this sort of confidence building effort and actual money out the door.


Now there's a game theoretical exercise of Keynesian animal spirits expecations if there ever was one. It's not about what they actually get, it's about what they think they'll get, even if they have to pay back what they actually got.

That's how Paulson and Bernanke sold Bush on TARP. The absolute amount actually laid out didn't matter. All that mattered was the expectation that it was available unconditionally if needed in order to unfreeze the commercial credit market, just like Paulson demanded.

Well, in that case why not just tell employers that there's a huge amount of stimulus spending money available if they need it in order to unfreeze the stalemate on hiring. Just knowning it's there will build up confidence and return the economy to full employment with jobs like the bankers have in no time at all.

Stupid liberals.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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