Why is $700 billion the magic number?
TEXT OF STORY
KAI RYSSDAL: $700 billion is the magic bailout number. But for all we know Henry Paulson licked his finger, stuck it up in the air and said, “Right, 700 billion.”
We asked Marketplace’s Dan Grech to find out what really happened.
DAN GRECH: Why 700 billion?
JOSH ROSNER: Nobody knows. Um, nobody knows.
That’s Josh Rosner. He’s an expert on mortgage-backed securities at Graham Fisher & Company. Rosner says you can’t answer the $700 billion question because . . .
ROSNER: There’s such interconnectedness in our financial system. And so no one is really sure where one company’s balance sheet ends and another’s begins.
It is estimated that bad home loans could cause losses of between $500 billion and $1 trillion. Economist Vincent Reinhart worked for the Federal Reserve for 25 years.
VINCENT REINHART: It was arbitrary. It was intentionally a big number so it would be large enough to contain the problem.
Reinhart says the bailout also had to be big enough to calm panicky markets.
REINHART: I don’t think there’s a simple arithmetic to this process. The bottom line is we are entering uncharted territory.
One thing’s clear: It’s a whole lot of money. Roughly $2,300 for every man, woman and child in the country.
I’m Dan Grech for Marketplace.
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