Variables in Your Bailout Math

When any business makes a decision, it performs cost vs. benefit calculations. IRR, MIRR, and NPV are all capital budgeting calculations used to determine the best "bang for the buck" decision. MIRR is likely most valid here, as the 700B spent here is being actively evaluated against the Obama spending agenda by Liberal opponents of the deal. Conservatives, presumably, are evaluating it against the cost of making and using ICBMs.

Hank Paulson did not get his undergrad without understanding these calculations. His responsibility as Treasurer requires that he perform them to determine if this project is the best possible value for the American people. Doing so will require estimates, and variables that are codependent across the calculations. It's complex, and uncertain - Investment Banking is an inexact science, and best at producing ranges of potentiality. Fortunately, we have an i-Banking mensch running the show.

You're already running this in your head - absent, well, the math to justify your protest - when you say "But we could have XYZ social program instead!" The question is not whether you could have that program, but how that program's value is returned in exchange for taxpayer expenses. Meaning, which plan stabilizes and provides for the growth of tax revenues the best? Let's compare the 700B bailout to, say, a socialized health care plan

Variables in Hank's math:

1.) Per-Annum Cash outflows

The Treasury increases revenue by keeping taxpayers employed and generating revenue. The banking system is a major economy component - some 1/6th of total GDP, much of it taxed as normal wage income. In addition, the services banking provides to the wealthy generate substantial cap gains tax revenue. A "run on the bank" removes that as well. The connection between bank failure and decreased tax receipts is a powerful one. Estimates should be performed here to determine the expected losses.

Meanwhile, medical bankruptcy is arguably less related to job loss, although obviously connected. It also doesn't impact high income individuals - IE, more taxes - the way banking system failure would. There are numbers on this out there, and ranges should be incorporates.

Also, we're getting this money from foreign counterparties, hence the pre-deal collapse of the dollar and related rise in commodity prices. Debt service drags revenues. The "lower cost" plan has a major advantage here, because in a vacuum we're borrowing effectively all of this money.

2.) Per-annum Cash inflows

A health-care system would likely generate no revenue. It's a service provided to taxpayers. Out-of-pocket expenses for more extreme procedures aren't clear, although they would likely be absorbed by the government in many cases.

Investing in these debt securities at 22c on the dollar produces a range of possibilities, from a total loss to an 88c (or more) profit. In addition, the mortgage service will generate these revenues as cash on a monthly basis for Uncle Sam, increasing the liquidity of the Treasury.

3.) Duration

The debt securities don't have a very long lifespan - the mortgage cycle for homeowners is typically 7 years. Theoretically 30-60 years is possible for component mortgages within the securities, but generally 7 years is the rule of thumb for expiration. Furthermore, we realize the value of these securities on a monthly basis.

Meanwhile, with health care, we have no idea what the expense profile looks like 30, 50, 100 years in the future. It's impossible to guess. But a massive Boomer-driven increase in cost is fast approaching, flooding the system with exponentially more aging people with increased tendencies to demand medication, surgery, and long-term care.