A Trillion Here, a Trillion There. . .

and, as a latter-day Everett Dirksen might say, soon you’re talking real money. As Bilmes and Stiglitz have estimated, the Iraq War will likely ultimately cost three trillion dollars. Today’s Krugman column in the NYT suggests that the cost of bailing out ailing US financial institutions may approach these figures:

The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States. If these numbers shock you, they should. But the big bailout is coming.

Krugman pins the blame squarely on a market fundamentalism that blinded regulators to extraordinary risks accumulating over the past five years:

Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.

The deep irony here is that the same ideological movement that promised deep tax cuts for all may be delivering a staggering national debt that will assure everyone higher tax bills–paid out in large part to foreign owners of our national debt.

As I’ve mentioned earlier on this blog, Bob Kuttner has harkened back to the 1933 Pecora Hearings as an analogue for the type of fundamental re-evaluation of the financial order that we may need to do today. After having a decade of policy mirroring 1920s era laissez-faire, I hope we aren’t in for a replay of the 1930s.

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