Thus, it is in 2009 and 2010 that we can expect to see a similar drop-off this time around (and probably one that’s somewhat steeper, because April 2008’s record revenue figure was more extreme).
A Budget Deficit Burdened by Billions in Bailouts
In 2001 and 2002, the new Bush administration cut taxes by about $150 billion per annum, and also increased spending (though not for the Iraq War, which began after Fiscal 2002 ended.) It’s pretty unlikely that we will see a similar tax cut in Fiscal 2009 or 2010 (though a short-term stimulus similar to the recent one might be possible).
However, over and above the normal increases in federal spending we will have an additional factor: The cost to the taxpayer of bailing out Fannie Mae (FNM), Freddie Mac (FRE), Bear Stearns Cos. Inc. (BSC) and possibly even the Deposit Insurance Fund itself, should any more banks the size of IndyMac Bancorp Inc. (OTC: IDMC) go bust and require payouts.
The Congressional Budget Office (CBO) recently estimated the bailout cost for Fannie Mae and Freddie Mac at a total of $25 billion. Don’t believe a word of it! Both political parties seem to want to bail these mortgage giants out, so the CBO appears to be deliberately low-balling the estimate in order to make the bailout go through smoothly.
First, they assume a 50% chance that bailout funds will not be needed (thus reducing the "expected value" of the payout from $50 billion to $25 billion. In reality, while there certainly is a chance that bailout funds might not be needed, it’s nothing like 50%. Fannie Mae and Freddie Mac loaded up their books with subprime mortgages in 2005-2007, and would be insolvent today if they had been forced to account for those assets on the same basis as the Wall Street banks. Thus, the chance that their losses on the rubbish paper they hold will exceed their capital is far more than 50%.
At the other end of the risk spectrum, the CBO admits (deep, deep, in the undergrowth of impenetrable bureaucratic prose, and not included in the summary) that there is a "5% chance" that the bailout will cost more than $100 billion. Market analysts not on the government’s payroll seem to agree that $100 billion to $150 billion is a conservative estimate of the bailout’s cost, with one analyst putting its potential cost as high as $600 billion.
