Mortgage Bailout to Cost Taxpayers Billions

The federal government's decision to seize control of mortgage giants Fannie Mae and Freddie Mac this weekend may stabilize the troubled housing markets, but it'll also add billions to the federal deficit.

The deal would essentially make the taxpayers liable for bad mortgage lending by private companies, but federal officials argued that this was the best way of stemming the credit crisis. Investors worldwide hold $5 trillion in debt backed by the two firms, and their failure would shake the global economy. The move may bring down interest rates, but experts are less sure that it will stem foreclosures and falling home prices.

It's not clear how much the bailout would cost the taxpayers, but Congress has authorized up to $200 billion for the job. In July, the Congressional Budget Office estimated a bailout would cost $25 billion in 2009-10, but some experts think that's too low.

To put that into perspective, $25 billion is slightly less than the federal government spent on agriculture in 2006, and more than it spent on science and technology, including the space program. By contrast, $200 billion is more than we spend on Iraq per year (the Congressional Budget Office estimates we spend $11 billion a month on the war).

So far there's little disagreement among experts about the need for the bailout, and the stock market rallied on the news. But the extra expense comes at a time when the federal government is already running an estimated half-trillion deficit. Unless the government decides to cut spending or raise taxes, it'll have to increase the deficit and borrow the money for this, adding onto the $9.5 trillion national debt.

So essentially, the government will be borrowing money to stave off the effects of bad lending in the mortgage market. And it comes at a time when the government's long-term financial situation is already troubled. In fact it underscores one of the main reasons for keeping federal finances under control: you have the flexibility to respond to emergencies. Right now the government still has that flexibility, but if the projections for its long-term fiscal health hold up, a time may come when Washington doesn't have that option.