How Will McCain or Obama Pay For This Mess?

New York Daily News | October 14, 2008

The agreement on the $700 billion bailout package begs the question, "How are we going to pay for all this?"

In the three presidential and vice presidential debates to date, the candidates have done their best to dodge the question. But it is not an issue that can be ignored for long. For anyone who needs to be reminded of the dangers of excessive borrowing, they need not look any further than the crisis we are currently in the midst of.

One of the many lessons from the spectacular financial market implosion is the importance of having a federal budget that is in good enough shape to respond to national crises as they come along. Whether it's a war, a natural disaster or a financial crisis, the government needs to maintain a balance sheet that is strong enough to meet national needs.

Unfortunately, years of deficit spending have led to a weakened position for our government. The wars in Iraq and Afghanistan? We are borrowing to pay for them. New spending for prescription drugs, homeland security, roads, farmers and more? Borrowed funds. New rounds of tax cuts each year? We put them on the tab. As a painful reminder of all this borrowing, the national debt clock just ran out of space as we passed the $10 trillion mark; now we have to pay to add a new zero.

And ironically, because of all this irresponsible borrowing, the very package crafted to save the economy could actually harm it.

Since the government doesn't have $700 billion lying around, a critical question will be whether or not our lenders are willing to front us the hundreds of billions of dollars needed to recapitalize our flailing financial sector. This line of credit will have to come on top of the more than $400 billion we are already borrowing this year alone. And since Americans don't have sufficient savings, we will have to turn to our overseas lenders to help cover those costs.

If they become skittish about sinking more money into the U.S. when they are not yet confident where our economy is headed, we will need to raise interest rates - the amount we pay for borrowed funds - to attract the needed capital. This in turn will increase the cost of private borrowing for everything from homes to cars to small business investments; even credit card rates will go up. Instead of borrowing, we could simply print money (a scenario being discussed in many financial circles), but this would greatly devalue the currency and lead to a reduction in the value of Americans' savings.

Critical in avoiding either of these outcomes will be a credible commitment to strengthening the U.S.' fiscal balance sheet at the same time we attend to the balance sheets of the financial sector.